Armada Hoffler's Latest Structured Development Deal at Annapolis Junction Town Center

Annapolis Junction Town Center rendering

VIRGINIA BEACH, VA—Armada Hoffler Properties is investing in the up-and-coming Annapolis Junction Town Center mixed-use project with a structured construction deal it has secured with the project’s developer.  This contract follows a similarly-structured deal the REIT made at the end of 2015 to participate in the new $93 million Point Street Apartments project underway at Baltimore’s Inner Harbor East. A breakdown of the latter’s financials shows why Armada Hoffler likes these kinds of investments  — and also suggests that it will be looking to close additional such deals. And from a bigger picture, they provide diversification on many levels. As CEO Louis Haddad has said about both projects, because they include an option to purchase a majority stake in the project at cost, the REIT gets “a healthy wholesale to retail spread.” The Residences at Annapolis Junction Town Center Armada Hoffler will serve as the general contractor of a 416-unit residential project at Annapolis Junction Town Center called the Residences at Annapolis Junction Town Center that will be located next to the Savage MARC Commuter Rail Station. The project is scheduled to break ground in the second quarter of 2016 and deliver in the first quarter of 2018. As part of the transaction, Armada Hoffler is providing $42 million in mezzanine financing at an annual interest rate of 10% to the developer. There is a $68 million guaranteed maximum price construction contract for the project. When it delivers, Armada Hoffler has a purchase option to acquire an 88% interest in the project at the cost basis. Why Annapolis Junction Town Center Annapolis Junction Town Center is a planned 18-acre mixed-use development that can support 17,000 square feet of retail space, a 150-room hotel and 100,000 square feet of office space at full build out. Master developer Somerset Construction Co. acquired the site as a 12-acre transit-oriented development from Petrie Ross Ventures LLC. It then purchased an additional six acres. OA Partners is also the master developer of the project. Its proximity to the Savage MARC rail station is part of the appeal of this project, as well as Fort Meade, which is two miles away. Fort Meade, of course, is the state’s largest employer and home to both the National Security Agency and the US Cyber Security Command. A Deal Similar to Point Street Apartments This is nearly the same structure Armada Hoffler used in its investment in the Point Street Apartments project, which will feature 289 luxury apartment units and 18,000-square feet of retail. According to comments made by Haddad during the REIT’s earnings call in February 2016, the opportunity to invest in the project arose from its long association with Beatty Development Group. The REIT’s investment in that project breaks down as follows: it has provided a $23 million mezzanine loan at an interest rate of 8%. Construction, as is typical, will take time to ramp up, so the $23 million loan will not be fully funded until late second quarter, according to the company’s CFO Michael O’Hara, who provided these details during the same earnings call. The construction contract is expected to be approximately $67 million with a fee of 3%, O’Hara said. In that project as well, Armada Hoffler has an option to purchase an 88% stake in the project at cost when it delivers. More to Come? Haddad said that the REIT was exploring a number of similarly structured opportunities with other developers but that it would be premature to discuss specifics. “We have enough confidence in a number of these potential projects to include their impact on our 2016 guidance range,” he said. Armada Hoffler reported a construction segment gross profit in the fourth quarter of $1.1 million on revenue of $41 million. For the year, it reported a segment gross profit of $5.9 million on revenue of $171 million. This compares to a segment gross profit of $4.6 million on revenue of $103 million for 2014. At the end of the fourth quarter, it had a third-party construction backlog of $83 million.