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Based in Virginia Beach, VA, Armada Hoffler Properties (NYSE:AHH) scheduled a $175 million IPO with a market capitalization of $333.5 million at a price range mid-point of $12, for Wednesday, May 8, 2013.

10 other IPOs are scheduled for the week of May 6th. The full IPO calendar is here.

  • S-11A filed April 6, 2013
  • Manager, Joint Managers: Baird; Raymond James; Stifel
  • Co Managers: Oppenheimer, BB&T Capital, Janney Montgomery Scott, Wunderlich

SUMMARY

Post IPO AHH plans on paying a dividend of $.63 per share, which is 5.25% on an annualized basis at the price range mid-point of $12.

However, 47% of AHH's proforma 2012 revenue came from general contracting. There has never been a REIT in history with such a high revenue percentage coming from general contracting.

Also, the price-to-tangible book value is too high, at 5.9.

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

annualizing March qtr

Cap (NYSE:MM)

Sales

Pre-tax earnings

BookVlue

TangibleBV

in IPO

Armada Hoffler Properties

$334

2.93

27.3

1.00

5.9

53%

Glossary

UPREIT

AHH was formed as a Maryland corporation in October 2012 and will begin operations upon completion of the IPO and the formation transactions.

CONCLUSION

Pass on the AHH IPO. 47% of AHH's proforma revenue in 2012 was from general contracting. General contracting does not lend itself to a REIT-type organizational structure.

BUSINESS

AHH intends to function as a REIT. But 47% of revenue for 2012 is from general contracting.

In all our experience we have never seen a general contractor trying to masquerade as a REIT. There are several proposed acquisitions based on the IPO, expected to be bought without arms length appraisal.

Those properties should not be bought from controlling stockholders without arms length appraisals - that's a red flag.

AHH was formed as a Maryland corporation in October 2012 to succeed to the business of Armada Hoffler, a privately owned real estate business founded in 1979.

PROPERTIES

Office: 44% of annualized rent as of December 31, 2013. Seven properties consisting of 1.0 million net rentable square feet, which were approximately 94.1% leased and as of December 31, 2012.

Retail: 38% of annualized rent as of December 31, 2013. Fifteen properties consisting of 1.1 million net rentable square feet, which were approximately 93.9% leased as of December 31, 2012.

Multifamily: 18% of annualized rent as of December 31, 2013. Two properties consisting of 626 apartment units, which were 94.9% as of December 31, 2012.

GROWTH PLAN

Prior to the closing of this offering AHH will enter into a purchase agreement to acquire the Apprentice School Apartments, a 197-unit multi-family property located in Newport News, Virginia, upon satisfaction of certain conditions, which is currently expected to occur in November 2013.

Upon completion of this offering and the formation transactions, AHH also will succeed to Armada Hoffler's development pipeline, which consists of two office properties, two retail properties and two mult-ifamily properties in various stages of development.

Based on current development plans and agreements, AHH expects that the projects in its identified development pipeline will consist of a total of 290,000 square feet of office space, 90,000 square feet of retail space and 491 apartment units.

Prior to the completion of this IPO, AHH will also enter into agreements providing options to purchase eight parcels of developable land from certain of the executive officers and their affiliates.

RISK

AHH has not obtained any third-party appraisals of the properties and other assets to be acquired by AHH from the prior investors in connection with the formation transactions.

Accordingly, the value of the cash and common units to be paid or issued as consideration for the properties and assets to be acquired by AHH in the formation transactions may exceed their aggregate fair market value and will exceed their aggregate historical combined net tangible book value of $(41.3) million as of December 31, 2012.

Note: Looks like a bailout for Messrs. Hoffler, Haddad and Kirk.

The value is in Armada Hoffler, L.P. , which will be 53% owned by the public entity AHH. 37% of the LP will be owned by Armada Affiliates.

Post IPO the following will own the specified percentages of AHH: Daniel A. Hoffler, 20%; A. Russell Kirk, 4.2%; Louis S. Haddad, 7.2%.

ARMADA HOFFLER, L.P. will own 53% of AHH. We can assume the owners of Armada Hoffler, L.P. will be Hoffler, Kirk, and Haddad.

DISTRIBUTION POLICY

On an annualized basis, AHH expects to pay $0.63 per share, or an annual dividend rate of 5.25%, based on the midpoint of the price range. AHH intends to maintain the initial dividend rate for the 12-month period following completion of the IPO.

After that, the dividend may depend on the health of the general contracting business.

USE OF PROCEEDS

AHH expects to net $160 million from its IPO. Proceeds are allocated as follows:

  • $112.8 million to repay outstanding indebtedness, including exit fees, defeasance costs and assumption costs of $2.2 million (this gets the major shareholders off of loan guarantees).
  • $44.0 million to pay prior investors in connection with the formation transactions (think bailout); and ...
  • the remaining net proceeds, if any, for general corporate purposes, including working capital, future acquisitions, transfer taxes and, potentially, paying distributions.

Disclaimer: This AHH IPO report is based on a reading and analysis of AHH's S-11A filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Source: IPO Preview: Armada Hoffler Properties