Armada Hoffler Properties, Inc. - Quarter Report: 2013 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2013

or

For the transition period from                      to                     

Commission file number: 001-35908

ARMADA HOFFLER PROPERTIES, INC.

(Exact Name of Registrant as Specified in its Charter)

(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 or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

The number of Registrant’s common shares outstanding on November 8, 2013 was 19,163,623.

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ARMADA HOFFLER PROPERTIES, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2013

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PART I. Financial Information

ARMADA HOFFLER PROPERTIES, INC. AND PREDECESSOR

Condensed Consolidated and Combined Balance Sheets

(In Thousands, except par value and share data)

See Notes to Condensed Consolidated and Combined Financial Statements.

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ARMADA HOFFLER PROPERTIES, INC. AND PREDECESSOR

Condensed Consolidated and Combined Statements of Income

(In Thousands, except per share data)

(Unaudited)

See Notes to Condensed Consolidated and Combined Financial Statements.

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ARMADA HOFFLER PROPERTIES, INC. AND PREDECESSOR

Condensed Consolidated and Combined Statement of Equity

(In Thousands, except share data)

(Unaudited)

See Notes to Condensed Consolidated and Combined Financial Statements.

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ARMADA HOFFLER PROPERTIES, INC. AND PREDECESSOR

Condensed Consolidated and Combined Statements of Cash Flows

(In Thousands)

(Unaudited)

See Notes to Condensed Consolidated and Combined Financial Statements.

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ARMADA HOFFLER PROPERTIES, INC. AND PREDECESSOR

Notes to Condensed Consolidated and Combined Financial Statements

(Unaudited)

Armada Hoffler Properties, Inc. (the “Company”) is the sole general partner of Armada Hoffler, L.P. (the “Operating Partnership”). The operations of the Company are carried on primarily through the Operating Partnership and wholly owned subsidiaries of the Operating Partnership. Both the Company and the Operating Partnership were formed on October 12, 2012 and commenced operations upon completion of the underwritten initial public offering of shares of the Company’s common stock (the “IPO”) and certain related formation transactions (the “Formation Transactions”) on May 13, 2013.

Armada Hoffler Properties, Inc. Predecessor (the “Predecessor”) is not a single legal entity, but rather a combination of real estate and construction entities. The Predecessor is engaged in the development, construction, ownership and management of office, retail and multifamily properties in markets throughout the Mid-Atlantic United States. The entities comprising the Predecessor include: (i) the property development and asset management businesses of Armada Hoffler Holding Company, Inc. (“AH Holding”), (ii) the general commercial construction businesses of Armada Hoffler Construction Company and Armada Hoffler Construction Company of Virginia (collectively, “AH Construction”), (iii) controlling interests in entities that own 22 properties (seven office, 14 retail and one multifamily), (iv) controlling interests in entities undertaking the development of six properties (two office, two retail and two multifamily, collectively the “Development Pipeline”) and (v) non-controlling interests in entities that own one retail property and one multifamily property (collectively, the “Non-controlled Entities”). AH Holding, AH Construction, the controlling interests in the 22 real estate properties and the controlling interests in the Development Pipeline are referred to as the Controlled Entities. The Controlled Entities were under common ownership by their individual partners, members and stockholders and under common control by Daniel A. Hoffler prior to the IPO and the Formation Transactions. Mr. Hoffler had the ability to control each of the Controlled Entities as the primary beneficiary, the majority vote holder or through his interest as a general partner or managing member. The financial position and results of operations of the Controlled Entities have been combined in the Predecessor financial statements for the periods prior to the completion of the IPO and the Formation Transactions. The Predecessor accounted for its investments in the Non-controlled Entities under the equity method of accounting.

Controlled Entities (Combined by the Predecessor)

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Non-controlled Entities (Accounted for under the equity method by the Predecessor)

Initial Public Offering and Formation Transactions

On May 13, 2013, the Company completed the IPO of 16,525,000 shares of common stock priced at $11.50 per share. On May 22, 2013, the underwriters of the IPO exercised their overallotment option in full to purchase an additional 2,478,750 shares at the IPO price of $11.50 per share. Proceeds from the IPO to the Company after deducting the underwriting discount were approximately $203.2 million. The common shares are listed on the New York Stock Exchange under the symbol “AHH” and began trading on May 8, 2013. The Company contributed the net proceeds from the IPO to the Operating Partnership in exchange for common units in the Operating Partnership. The Operating Partnership repaid approximately $150.0 million of outstanding indebtedness and paid approximately $47.2 million as partial consideration to prior investors in connection with the Formation Transactions.

Pursuant to the Formation Transactions, the Operating Partnership: (i) acquired 100% of the interests in the Controlled Entities and the Non-controlled Entities, (ii) succeeded to the ongoing construction and development businesses of AH Holding and AH Construction, (iii) assumed asset management of certain of the properties acquired from the Predecessor, (iv) succeeded to the third party asset management business of AH Holding, (v) succeeded to the projects in the Development Pipeline, (vi) received options to acquire nine parcels of developable land from the Predecessor and (vii) entered into a contribution agreement to acquire Liberty Apartments, a 197-unit multifamily property located in Newport News, VA, upon satisfaction of certain conditions and transferability restrictions including completion of the project’s construction by AH Construction.

The Company accounted for the contribution or acquisition of interests in the Controlled Entities as transactions among entities under common control because Mr. Hoffler had the ability to control each of the Controlled Entities as previously described. As a result, the contribution or acquisition of interests in each of the Controlled Entities was accounted for at the Predecessor’s historical cost. The acquisitions of interests in the Non-controlled Entities were accounted for as purchases at fair value under the acquisition method of accounting.

On May 13, 2013, the Operating Partnership, as borrower, and the Company, as parent guarantor, entered into a $100.0 million senior secured revolving credit facility. Subject to the satisfaction of certain conditions, the Operating Partnership has the option to increase the borrowing capacity under the revolving credit facility to $250.0 million. The revolving credit facility has a three-year term with an initial maturity date of May 13, 2016 and bears interest between LIBOR plus 1.60% and LIBOR plus 2.20%. The Operating Partnership has the option to extend the term to May 12, 2017. Upon completion of the IPO, the Operating Partnership borrowed $40.0 million under the revolving credit facility to fund a portion of the consideration payable in connection with the completion of the Formation Transactions, repay existing lines of credit and certain debt relating to the projects in the Development Pipeline and repay existing indebtedness relating to certain properties acquired in connection with the Formation Transactions.

Because of the timing of the IPO and the Formation Transactions, the Company’s financial condition as of December 31, 2012 and results of operations for the three and nine months ended September 30, 2012 reflect the financial condition and results of operations of the Predecessor. The Company’s results of operations for the nine months ended September 30, 2013 reflect the results of operations of the Predecessor together with the Company, while the financial condition as of September 30, 2013 and the results of operations for the three months ended September 30, 2013 reflect those solely of the Company. References in

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these notes to condensed consolidated and combined financial statements to “Armada Hoffler” signify the Company for the period after the completion of the IPO and the Formation Transactions on May 13, 2013 and the Predecessor for all prior periods.

Federal Income Taxes

The Company intends to elect to be taxed and to operate in a manner that will allow it to qualify as a real estate investment trust for federal income tax purposes commencing with the taxable year ending December 31, 2013.

Emerging Growth Company Status

The Company qualifies as an emerging growth company (“EGC”) pursuant to the Jumpstart Our Business Startups Act. An EGC may choose to take advantage of the extended private company transition period provided for complying with new or revised accounting standards that may be issued by the Financial Accounting Standards Board or the U.S. Securities and Exchange Commission (the “SEC”). The Company has elected to opt out of such extended transition period. This election is irrevocable.

Principles of Consolidation and Combination and Basis of Presentation

The accompanying consolidated and combined financial statements were prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the financial position and results of operations of the Company, the Operating Partnership and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

The financial position and results of operations of the entities comprising the Predecessor have been combined because they were under the common control of Mr. Hoffler and under the common management by Armada Hoffler. All significant intercompany transactions and balances have been eliminated in combination.

In the opinion of management, the consolidated and combined 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 consolidated and combined 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 combined financial statements of the Predecessor for the year ended December 31, 2012, included in the Company’s final prospectus dated May 7, 2013 and filed with the SEC on May 9, 2013 (SEC File No. 333-187513).

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities as of the date of the financial statements. Such estimates are based on management’s best judgment, after considering past, current and expected events and economic conditions. Actual results could differ from management’s estimates.

Significant Accounting Policies

The accompanying consolidated and combined financial statements were prepared using the accounting principles described in the Company’s final prospectus dated May 7, 2013 (SEC File No. 333-187513).

Income Taxes

For periods prior to the completion of the IPO and the Formation Transactions on May 13, 2013, no provision was made for U.S. federal, state or local income taxes because profits and losses of the Predecessor flowed through to its respective partners, members and shareholders who were individually responsible for reporting such amounts.

For periods subsequent to the completion of the IPO and the Formation Transactions, the taxable REIT subsidiaries (“TRS”) of the Operating Partnership are subject to federal, state and local corporate income taxes. The Operating Partnership conducts its development and construction businesses through the TRS. The related income tax provision or benefit attributable to the profits or losses of the TRS is reflected in the consolidated and combined financial statements.

The Company uses the liability method of accounting for deferred income tax in accordance with GAAP. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the carrying value of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the statutory rates expected to be applied in the periods in which those temporary differences are settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period of the change. A valuation allowance is

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recorded on the Company’s deferred tax assets when it is more likely than not that such assets will not be realized. When evaluating the realizability of the Company’s deferred tax assets, all evidence, both positive and negative is evaluated. Items considered in this analysis include the ability to carryback losses, the reversal of temporary differences, tax planning strategies and expectations of future earnings.

Under GAAP, the amount of tax benefit to be recognized is the amount of benefit that is more likely than not to be sustained upon examination. Management analyzes its tax filing positions in the U.S. federal, state and local jurisdictions where it is required to file income tax returns for all open tax years. If, based on this analysis, management determines that uncertainties in tax positions exist, a liability is established. The Company recognizes accrued interest and penalties related to unrecognized tax positions in the provision for income taxes. If recognized, the entire amount of unrecognized tax positions would be recorded as a reduction to the provision for income taxes.

Noncontrolling Interests

Upon completion of the IPO and the Formation Transactions, the Operating Partnership issued 13,059,365 common units of limited partnership interest to the Predecessor’s prior investors as partial consideration for the contribution of their interests in the Predecessor to the Operating Partnership, which the Company recognized at fair value. Noncontrolling interests in the Company represent common units of the Operating Partnership held by the Predecessor’s prior investors. As of September 30, 2013, the Company held a 59.5% interest in the Operating Partnership. As the sole general partner and the majority interest holder, the Company consolidates the financial position and results of operations of the Operating Partnership.

Holders of common units may not transfer their units without the Company’s prior consent as general partner of the Operating Partnership. Beginning on the first anniversary of the completion of the IPO and the Formation Transactions, common unitholders may tender their units for redemption by the Operating Partnership in exchange for cash equal to the market price of shares of the Company’s common stock at the time of redemption or, at the Company’s option and sole discretion, for shares of common stock on a one-for-one basis. Accordingly, the Company presents the common units of the Operating Partnership held by the Predecessor’s prior investors as noncontrolling interests within equity in the consolidated balance sheet.

Dividends

On July 11, 2013, the Company paid cash dividends of approximately $1.5 million to common stockholders and approximately $1.1 million to common unitholders, representing $0.08 per share or unit.

On August 9, 2013, the Company’s Board of Directors declared a cash dividend of $0.16 per share or unit payable on October 10, 2013 to common stockholders and common unitholders of record on October 1, 2013. On October 10, 2013, the Company paid cash dividends of approximately $3.1 million to common stockholders and approximately $2.1 million to common unitholders. The aggregate $5.2 million dividend payable as of September 30, 2013 is presented within other liabilities in the condensed consolidated balance sheet.

Net Income Per Share

The Company calculates net income per share based upon the weighted average shares outstanding during the period beginning May 13, 2013. Diluted net income per share is calculated after giving effect to all potential dilutive shares outstanding during the period. There were no potential dilutive shares outstanding during the three or nine months ended September 30, 2013. As a result, basic and diluted outstanding shares were the same.

Segment information is prepared on the same basis that Armada Hoffler’s management reviews information for operational decision-making purposes. Management evaluates the performance of each of Armada Hoffler’s properties individually and aggregates such properties into segments based on their economic characteristics and classes of tenants. Armada Hoffler operates in four business segments: (i) office real estate, (ii) retail real estate, (iii) multifamily residential real estate and (iv) general contracting and real estate services. Armada Hoffler’s office properties provide office space for various types of businesses and professions. Armada Hoffler’s retail properties are a diverse mix of: (i) retail shopping centers typically anchored by large, nationally recognized tenants, (ii) retail centers located in the Virginia Beach Town Center and (iii) single-tenant properties. Armada Hoffler’s multifamily residential properties provide rental housing in Virginia Beach, VA and Blacksburg, VA. Armada Hoffler’s general contracting and real estate services business develops and builds properties for its own account and also provides construction and development services to related parties and third-party clients.

Net operating income (segment revenues minus segment expenses) is the measure used by Armada Hoffler’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. Armada Hoffler 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 Armada Hoffler’s real estate and construction businesses.

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Net operating income of Armada Hoffler’s reportable segments for the three and nine months ended September 30, 2013 and 2012 was as follows (in thousands):

General contracting and real estate services revenues for the three and nine months ended September 30, 2013 exclude revenue related to intercompany construction contracts of approximately $13.3 million and $18.9 million, respectively. General contracting and real estate services expenses for the three and nine months ended September 30, 2013 exclude expenses related to intercompany construction contracts of approximately $13.1 million and $18.7 million, respectively.

General contracting and real estate services revenues for the three and nine months ended September 30, 2012 exclude revenue related to intercompany construction contracts of approximately $0.2 million and $1.0 million, respectively. General contracting and real estate services expenses for the three and nine months ended September 30, 2012 exclude expenses related to intercompany construction contracts of approximately $0.2 million and $1.0 million, respectively.

The following table reconciles net operating income to net income for the three and nine months ended September 30, 2013 and 2012 (in thousands):

General and administrative expenses represent costs not directly associated with the operation and management of Armada Hoffler’s real estate properties. General and administrative expenses include office personnel salaries and benefits, bank fees, accounting fees and other office expenses. For the three and nine months ended September 30, 2013, general and administrative expenses include non-cash stock compensation of $0.2 million and $1.0 million, respectively.

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During the nine months ended September 30, 2013, the Company recognized $0.5 million of impairment charges representing unamortized leasing assets related to two vacated retail tenants.

Rental revenues of Armada Hoffler’s reportable segments for the three and nine months ended September 30, 2013 and 2012 comprised the following (in thousands):

Property expenses of Armada Hoffler’s reportable segments for the three and nine months ended September 30, 2013 and 2012 comprised the following (in thousands):

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

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Armada Hoffler’s real estate investments comprised the following as of September 30, 2013 and December 31, 2012 (in thousands):

As of September 30, 2013 and December 31, 2012, land includes approximately $2.3 million and $1.8 million, respectively, for the 4525 Main Street and Encore Apartments development projects. Development and construction costs capitalized in connection with the 4525 Main Street and Encore Apartments projects are presented as construction in progress as of September 30, 2013.

As discussed in Notes 1 and 9, the Operating Partnership acquired a controlling interest in Bermuda Crossroads and Smith’s Landing on May 13, 2013. As of September 30, 2013, land includes approximately $5.5 million related to Bermuda Crossroads.

As of September 30, 2013, land includes approximately $2.6 million related to the Whetstone Apartments project, which Armada Hoffler purchased on June 4, 2013. Development and construction costs capitalized in connection with the Whetstone Apartments project are presented as construction in progress as of September 30, 2013.

As of September 30, 2013, land includes approximately $5.2 million related to the Sandbridge Commons project, which Armada Hoffler purchased on August 27, 2013.

On January 3, 2013, Armada Hoffler modified the Main Street Land loan to extend the maturity date from January 5, 2013 to April 3, 2013. On March 25, 2013, Armada Hoffler modified the Main Street Land loan to extend the term to July 3, 2013, on which date the Company repaid the outstanding balance of the loan in full.

On January 16, 2013, Armada Hoffler modified the Virginia Natural Gas loan to lower the interest rate floor from 4.00% to 3.00%.

On February 19, 2013, Armada Hoffler modified the Gainsborough Square loan to extend the maturity date from December 28, 2013 to January 28, 2014.

On April 15, 2013, Armada Hoffler borrowed an additional $2.7 million on Broad Creek Shopping Center Note 2.

In connection with the IPO and Formation Transactions, the Company used proceeds from the IPO and the revolving credit facility to repay the following debt (in thousands):

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During the nine months ended September 30, 2013, the Company recognized a $1.1 million loss on extinguishment of debt representing $0.6 million of fees and $0.5 million of unamortized debt issuance costs associated with the debt repaid in connection with the IPO and Formation Transactions.

As discussed in Note 1, upon completion of the IPO, the Operating Partnership borrowed $40.0 million under the revolving credit facility to fund a portion of the consideration payable in connection with the completion of the Formation Transactions, repay existing lines of credit and certain debt relating to the projects in the Development Pipeline and repay existing indebtedness relating to certain properties acquired in connection with the Formation Transactions. The revolving credit facility has a three-year term with an initial maturity date of May 13, 2016 and bears interest between LIBOR plus 1.60% and LIBOR plus 2.20%. The Operating Partnership has the option to extend the maturity date to May 12, 2017. The Operating Partnership incurred approximately $1.8 million of costs in connection with the revolving credit facility.

On July 16, 2013, the Operating Partnership borrowed an additional $15.0 million under the revolving credit facility and defeased the One Columbus loan on July 17, 2013 for $14.9 million, including costs of $1.0 million. The Company recognized a $1.0 million loss on extinguishment of debt representing fees and unamortized debt issuance costs.

On July 30, 2013, the Company closed on a $63.0 million construction loan to fund the 4525 Main Street and Encore Apartments development projects. The construction loan bears interest at LIBOR plus 1.95% and matures on January 30, 2017. As of September 30, 2013, the Company did not have any amounts outstanding on the construction loan.

As of September 30, 2013, the Operating Partnership had $45.0 million outstanding and $55.0 million available on the revolving credit facility for which Armada Hoffler Tower, Richmond Tower, Virginia Natural Gas and Sentara Williamsburg collectively served as the borrowing base collateral. As of September 30, 2013, the interest rate on the revolving credit facility was 1.93%.

Subsequent to September 30, 2013:

On October 8, 2013, the Company borrowed an additional $15.0 million under the revolving credit facility, resulting in an outstanding balance of $60.0 million on the revolving credit facility.

On October 8, 2013, the Company closed on an $18.5 million construction loan to fund the Whetstone Apartments development project in Durham, NC. The construction loan bears interest at LIBOR plus 1.90% and matures on October 8, 2016, with a one-year extension option. As of the date of this filing, the Company did not have any amounts outstanding on this construction loan.

On October 10, 2013, the Operating Partnership increased the aggregate capacity under the revolving credit facility to $155.0 million by adding the following six properties to the borrowing base collateral: i) One Columbus, (ii) Two Columbus, (iii) a portion of North Point Center, (iv) Gainsborough Square, (v) Parkway Marketplace and (vi) Courthouse 7-Eleven.

On October 11, 2013, the Operating Partnership repaid the Bermuda Crossroads loan for approximately $10.8 million.

On October 25, 2013, the Operating Partnership amended Broad Creek Shopping Center Notes 1, 2 and 3 to lower the interest rates to LIBOR plus 2.25% and extend the maturity dates to October 31, 2018. The lender also agreed to make Broad Creek Shopping Center Notes 1, 2 and 3 each non-recourse loans.

On October 31, 2013, the Operating Partnership amended the Commerce Street Retail loan, Hanbury Village Note 2 and the Tyre Neck Harris Teeter loan to lower the interest rates to LIBOR plus 2.25% and extend the maturity dates to October 31, 2018. The Operating Partnership collectively prepaid approximately $1.4 million of principal on these three loans. The lender also agreed to make the Commerce Street Retail loan, Hanbury Village Note 2 and the Tyre Neck Harris Teeter loan each non-recourse loans.

As of the date of this filing, the Company had approximately $5.9 million outstanding on the 4525 Main Street and Encore Apartments construction loans.

Armada Hoffler may enter into interest rate derivatives to manage exposure to interest rate risks. Armada Hoffler does not use derivative financial instruments for trading or speculative purposes and has not designated any of its derivatives as hedges for accounting purposes. As a result, changes in the fair value of derivatives are recognized currently within other income in the consolidated and combined statements of operations.

On September 1, 2013, Armada Hoffler executed three interest rate cap agreements with a total notional amount of approximately $103.0 million, strike prices ranging from 1.50% to 3.50% and terms ending on March 1, 2016. The total premium paid to execute the three interest rate cap agreements was approximately $0.2 million.

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Armada Hoffler’s derivatives comprised the following as of September 30, 2013 and December 31, 2012 (in thousands):

The changes in the fair value of Armada Hoffler’s derivatives during the three and nine months ended September 30, 2013 and 2012 comprised the following (in thousands):

The Predecessor had a deferred compensation plan for certain key employees pursuant to which Armada Hoffler purchased whole life insurance policies. Armada Hoffler discontinued its deferred compensation plan in May 2013 and as result, the Company has no further obligation under this plan. As of December 31, 2012, the Predecessor’s deferred compensation liability and cash surrender value of life insurance policies were both approximately $1.2 million.

The Armada Hoffler Properties, Inc. 2013 Equity Incentive Plan provides for stock based awards in the form of options, restricted shares and other equity awards up to an aggregate of 700,000 shares over the ten-year term of the plan.

During the nine months ended September 30, 2013, the Company granted an aggregate of 168,642 shares of restricted stock to employees and non-employee directors at a grant date fair value of $11.50. Using the accelerated attribution method, the Company recognized stock based compensation related to vested shares during the three and nine months ended September 30, 2013 of approximately $0.2 million and $1.0 million, respectively. As of September 30, 2013, there were 112,223 non-vested restricted shares outstanding; the total compensation cost related to non-vested restricted shares was approximately $0.9 million, which we expect to recognize over the next 21 months.

Fair value measurements are based on assumptions that market participants would use in pricing an asset or a liability. The hierarchy for inputs used in measuring fair value is as follows:

Level 1 Inputs—quoted prices in active markets for identical assets or liabilities

Level 2 Inputs—observable inputs other than quoted prices in active markets for identical assets and liabilities

Level 3 Inputs—unobservable inputs

Except as disclosed below, the carrying amounts of Armada Hoffler’s financial instruments approximate their fair value. Financial assets and liabilities whose fair values are measured on a recurring basis using Level 2 inputs consist of interest rate swaps, interest rate caps, the cash surrender value of life insurance and deferred compensation. Armada Hoffler 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.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. For disclosure purposes, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

The fair value of Armada Hoffler’s secured debt is sensitive to fluctuations in interest rates. Discounted cash flow analysis based on Level 2 inputs is generally used to estimate the fair value of Armada Hoffler’s secured debt.

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.

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The carrying amounts and fair values of our financial instruments, all of which are based on Level 2 inputs, as of September 30, 2013 and December 31, 2012 were as follows (in thousands):

As discussed in Note 1, the Company completed the IPO of shares of its common stock on May 13, 2013. Substantially concurrent with the completion of the IPO and in connection with the Formation Transactions, the Operating Partnership acquired 100% of the interests in the Non-controlled Entities of the Predecessor (Bermuda Crossroads and Smith’s Landing).

The acquisitions of the interests in Bermuda Crossroads and Smith’s Landing on May 13, 2013 were accounted for as purchases at fair value under the acquisition method of accounting. Total consideration in the form of cash and common units paid for the 50% interest in Bermuda Crossroads was approximately $3.2 million. Total consideration in the form of cash and common units paid for the 60% interest in Smith’s Landing was approximately $7.5 million.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):

The identified intangible assets for Bermuda Crossroads are primarily in-place leases. The in-place and below-market leases will be amortized over the weighted average lives of the remaining lease terms. The identified intangible assets for Smith’s Landing include $1.9 million assigned to a below-market ground lease and $0.5 million assigned to in-place leases, both of which will be amortized over the weighted average lives of the remaining lease terms. The fair value adjustment to the assumed secured debt of Bermuda Crossroads was a $0.2 million premium. The fair value adjustment to the assumed secured debt of Smith’s Landing was not significant.

Prior to the acquisition date, the Predecessor accounted for its 50% interest in Bermuda Crossroads and 40% interest in Smith’s Landing as equity-method investments. The acquisition-date fair values of the previous equity interests in Bermuda Crossroads and Smith’s Landing were approximately $3.2 million and $5.0 million, respectively. The Company recognized a gain of $9.5 million as a result of remeasuring the Predecessor’s prior equity interests in Bermuda Crossroads and Smith’s Landing held before the acquisitions.

The following table summarizes the consolidated and combined results of operations of Armada Hoffler, Bermuda Crossroads and Smith’s Landing on a pro forma basis, as if both Bermuda Crossroads and Smith’s Landing had been acquired as of January 1, 2012 (in thousands):

The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if these acquisitions had taken place on January 1, 2012. The pro forma financial information includes adjustments to depreciation and amortization expense for acquired property and intangible assets and liabilities, adjustments to rental revenue and rental expenses for above and below-market leases and adjustments to interest expense for fair value adjustments to assumed indebtedness.

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Pro forma net income for the nine months ended September 30, 2012 includes the nonrecurring $9.5 million gain as a result of remeasuring the Predecessor’s prior equity interests in Bermuda Crossroads and Smith’s Landing held before the acquisitions.

Rental revenues and net income of both Bermuda Crossroads and Smith’s Landing for the period from the acquisition date to September 30, 2013 included in the consolidated and combined statements of income were approximately $2.3 million and $(0.3) million, respectively.

Armada Hoffler presents properties held for sale as discontinued operations only when Armada Hoffler will not have any significant continuing involvement in the properties’ operations after their disposition and when the properties’ operations and cash flows: (i) can be clearly distinguished and (ii) will be eliminated from Armada Hoffler’s ongoing operations upon disposition. Armada Hoffler presented the held for sale Studio 56 residential condominium units as discontinued operations during the three and nine months ended September 30, 2012. Net sale proceeds during the nine months ended September 30, 2012 were approximately $0.5 million. Armada Hoffler sold the last Studio 56 residential condominium unit during the three months ended June 30, 2012. Armada Hoffler currently has no plans to develop and sell residential condominium units.

Armada Hoffler provides general contracting and real estate services to certain related party entities that are not included in these consolidated and combined financial statements.

Revenue from construction contracts with related parties of Armada Hoffler was approximately $10.6 million and $7.2 million for the three months ended September 30, 2013 and 2012, respectively. Fees from such contracts were approximately $0.3 million and $0.9 million for the three months ended September 30, 2013 and 2012, respectively.

Revenue from construction contracts with related parties of Armada Hoffler was approximately $35.7 million and $10.0 million for the nine months ended September 30, 2013 and 2012, respectively. Fees from such contracts were approximately $1.1 million and $1.0 million for the nine months ended September 30, 2013 and 2012, respectively.

Real estate services fees from affiliated entities of Armada Hoffler were not significant for either the three or nine months ended September 30, 2013 or 2012. In addition, affiliated entities also reimburse Armada Hoffler for monthly maintenance and facilities management services provided to the properties. Cost reimbursements from affiliated entities were not significant for either the three or nine months ended September 30, 2013 or 2012.

Amounts due to related parties as of September 30, 2013 include amounts payable to prior investors in connection with the Formation Transactions.

Distributions payable to the owners of the Predecessor of approximately $0.5 million are presented within due to affiliates in the combined balance sheet as of December 31, 2012.

Upon completion of the IPO and Formation Transactions, the Operating Partnership supplies letters of credit on behalf of the Company’s construction business.

Legal Proceedings

Armada Hoffler is from time to time involved in various disputes, lawsuits, warranty claims, environmental and other matters arising in the ordinary course of its business. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters.

Armada Hoffler currently is a party to various legal proceedings, none of which management expects will have a material adverse effect on Armada Hoffler’s financial position, results of operations or liquidity. Armada Hoffler accrues a liability for litigation if an unfavorable outcome is determined by management to be probable and the amount of loss can be reasonably estimated. If an unfavorable outcome is determined by management to be probable and a range of loss can be reasonably estimated, Armada Hoffler 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. Armada Hoffler does not believe that the ultimate outcome of these matters, either individually or in the aggregate, could have a material adverse effect on its financial position or results of operations; however, litigation is subject to inherent uncertainties.

Under Armada Hoffler’s leases, tenants are typically obligated to indemnify Armada Hoffler 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.

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As discussed in Note 5, the Company borrowed an additional $15.0 million on the revolving credit facility, closed on an $18.5 million construction loan to fund the Whetstone Apartments development project, increased the aggregate capacity under the revolving credit facility to $155.0 million, repaid the Bermuda Crossroads loan for approximately $10.8 million, amended six loans and borrowed approximately $5.9 million on the 4525 Main Street and Encore Apartments construction loans.

As discussed in Note 2, the Company paid an aggregate of approximately $5.2 million of cash dividends to common stockholders and common unitholders on October 10, 2013.

Effective October 24, 2013, Admiral Joseph W. Prueher, USN (Ret.) was unanimously elected to the Company’s Board of Directors (the “Board”). Admiral Prueher will serve until the Company’s annual meeting of stockholders to be held in 2014 and until his successor is duly elected and qualifies. In connection with his appointment, Admiral Prueher received a grant of 585 shares of restricted common stock under the Company’s 2013 Equity Incentive Plan. One-third of the grant vested on October 24, 2013, the date of grant, while the remaining two-thirds vest in equal amounts on the first two anniversaries following the date of grant, subject to Admiral Prueher’s continued service on the Board.

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Review Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders of

Armada Hoffler Properties, Inc.

We have reviewed the condensed consolidated balance sheet of Armada Hoffler Properties, Inc. (successor to the entities described in Note 1) as of September 30, 2013, and the related condensed consolidated and combined statements of income for the three and nine-month periods ended September 30, 2013 and 2012, the condensed consolidated and combined statements of cash flows for the nine-month periods ended September 30, 2013 and 2012 and the condensed consolidated and combined statement of equity for the nine-month period ended September 30, 2013. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated and combined financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the combined balance sheet of the entities described in Note 1 as of December 31, 2012, and the related combined statements of income, equity, and cash flows for the year then ended (not presented herein) and we expressed an unqualified audit opinion on those combined financial statements in our report dated March 25, 2013. In our opinion, the accompanying condensed combined balance sheet of the entities described in Note 1 as of December 31, 2012, is fairly stated, in all material respects, in relation to the combined balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Richmond, Virginia

November 12, 2013

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References to “we,” “our,” “us,” and “our company” refer to Armada Hoffler Properties, Inc., a Maryland corporation, together with our consolidated subsidiaries, including Armada Hoffler, L.P., a Virginia limited partnership, of which we are the sole general partner and which we refer to in this Quarterly Report on Form 10-Q as our Operating Partnership.

Forward-Looking Statements

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. We make statements in this report that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). In particular, statements pertaining to our capital resources, portfolio performance and results of operations contain forward-looking statements. Likewise, all of our statements regarding anticipated growth in our funds from operations and estimated general contracting and real estate services are forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

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:

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Business Description