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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM
10-Q
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended March 31, 2022  
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)
Maryland46-1214914
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
222 Central Park Avenue,Suite 2100
Virginia Beach,Virginia23462
(Address of principal executive offices)(Zip Code)
 
(757) 366-4000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par value per shareAHHNew York Stock Exchange
6.75% Series A Cumulative Redeemable Perpetual Preferred Stock, $0.01 par value per shareAHHPrANew York Stock Exchange
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.      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).      Yes       No 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large Accelerated Filer
Accelerated Filer
Non-Accelerated FilerSmaller 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       No
As of May 3, 2022, the registrant had 67,707,299 shares of common stock, $0.01 par value per share, outstanding. In addition, as of May 3, 2022, Armada Hoffler, L.P., the registrant's operating partnership subsidiary, had 20,621,336 units of limited partnership interest ("OP Units") outstanding (other than OP Units held by the registrant).


ARMADA HOFFLER PROPERTIES, INC.
 
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2022
 
Table of Contents
 
 Page
 
 
 
 
 
 
 
 
 
 
 
 
 





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,
2022
December 31,
2021
 (Unaudited) 
ASSETS  
Real estate investments:  
Income producing property$1,901,331 $1,658,609 
Held for development6,294 6,294 
Construction in progress66,216 72,535 
 1,973,841 1,737,438 
Accumulated depreciation(299,452)(285,814)
Net real estate investments1,674,389 1,451,624 
Real estate investments held for sale80,754 80,751 
Cash and cash equivalents32,910 35,247 
Restricted cash6,576 5,196 
Accounts receivable, net30,162 29,576 
Notes receivable, net133,557 126,429 
Construction receivables, including retentions, net19,780 17,865 
Construction contract costs and estimated earnings in excess of billings121 243 
Equity method investment20,777 12,685 
Operating lease right-of-use assets23,440 23,493 
Finance lease right-of-use assets46,711 46,989 
Acquired lease intangible assets111,530 62,038 
Other assets71,248 45,927 
Total Assets$2,251,955 $1,938,063 
LIABILITIES AND EQUITY  
Indebtedness, net$1,137,467 $917,556 
Liabilities related to assets held for sale41,364 41,364 
Accounts payable and accrued liabilities23,838 29,589 
Construction payables, including retentions33,177 31,166 
Billings in excess of construction contract costs and estimated earnings15,054 4,881 
Operating lease liabilities31,657 31,648 
Finance lease liabilities46,242 46,160 
Other liabilities54,952 55,876 
Total Liabilities1,383,751 1,158,240 
Stockholders’ equity:  
Preferred stock, $0.01 par value, 100,000,000 shares authorized:
6.75% Series A Cumulative Redeemable Perpetual Preferred Stock, 9,980,000 shares authorized; 6,843,418 shares issued and outstanding as of March 31, 2022 and December 31, 2021
171,085 171,085 
Common stock, $0.01 par value, 500,000,000 shares authorized; 67,695,361 and 63,011,700 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively
675 630 
Additional paid-in capital587,474 525,030 
Distributions in excess of earnings(145,687)(141,360)
Accumulated other comprehensive gain (loss)6,476 (33)
Total stockholders’ equity620,023 555,352 
Noncontrolling interests in investment entities23,794 629 
Noncontrolling interests in Operating Partnership224,387 223,842 
Total Equity868,204 779,823 
Total Liabilities and Equity$2,251,955 $1,938,063 

See Notes to Condensed Consolidated Financial Statements.
1


ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Comprehensive Income 
(In thousands, except per share data)
(Unaudited)
 Three Months Ended 
March 31,
 20222021
Revenues  
Rental revenues$54,635 $45,741 
General contracting and real estate services revenues24,650 35,563 
Total revenues79,285 81,304 
Expenses  
Rental expenses12,669 10,832 
Real estate taxes5,404 5,306 
General contracting and real estate services expenses23,821 34,275 
Depreciation and amortization18,557 18,066 
Amortization of right-of-use assets - finance leases278 189 
General and administrative expenses4,708 4,021 
Acquisition, development and other pursuit costs11 71 
Impairment charges47 3,039 
Total expenses65,495 75,799 
Gain on real estate dispositions, net 3,717 
Operating income13,790 9,222 
Interest income3,568 4,116 
Interest expense (9,031)(7,975)
Loss on extinguishment of debt(158) 
Change in fair value of derivatives and other4,182 393 
Unrealized credit loss (provision) release(605)55 
Other income (expense), net229 179 
Income before taxes11,975 5,990 
Income tax benefit301 19 
Net income12,276 6,009 
Net income attributable to noncontrolling interests:
Investment entities(100) 
Operating Partnership(2,183)(811)
Net income attributable to Armada Hoffler Properties, Inc.9,993 5,198 
Preferred stock dividends(2,887)(2,887)
Net income attributable to common stockholders$7,106 $2,311 
Net income attributable to common stockholders per share (basic and diluted)$0.11 $0.04 
Weighted-average common shares outstanding (basic and diluted)67,128 59,422 
Comprehensive income:  
Net income$12,276 $6,009 
Unrealized cash flow hedge gains7,722 2,276 
Realized cash flow hedge losses reclassified to net income787 1,078 
Comprehensive income20,785 9,363 
Comprehensive income loss attributable to noncontrolling interests:
Investment entities(100) 
Operating Partnership(4,183)(1,682)
Comprehensive income attributable to Armada Hoffler Properties, Inc.$16,502 $7,681 

See Notes to Condensed Consolidated Financial Statements.
2


ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Equity
(In thousands, except share data)
(Unaudited)
 Preferred stockCommon stockAdditional paid-in capitalDistributions in excess of earnings Accumulated other comprehensive lossTotal stockholders' equityNoncontrolling interests in investment entitiesNoncontrolling interests in Operating PartnershipTotal equity
Balance, December 31, 2021$171,085 $630 $525,030 $(141,360)$(33)$555,352 $629 $223,842 $779,823 
Net income— — — 9,993 — 9,993 100 2,183 12,276 
Unrealized cash flow hedge gains— — — — 5,907 5,907 — 1,815 7,722 
Realized cash flow hedge losses reclassified to net income— — — — 602 602 — 185 787 
Net proceeds from issuance of common stock— 45 65,149 — — 65,194 — — 65,194 
Noncontrolling interest in acquired real estate entity— — — — — — 23,065 — 23,065 
Restricted stock awards, net—  1,064 — — 1,064 — — 1,064 
Acquisitions of noncontrolling interests— — (3,901)— — (3,901)— — (3,901)
Redemption of operating partnership units— — 132 — — 132 — (132) 
Dividends declared on preferred stock— — — (2,887)— (2,887)— — (2,887)
Dividends and distributions declared on common shares and units ($0.17 per share and unit)
— — — (11,433)— (11,433)— (3,506)(14,939)
Balance, March 31, 2022$171,085 $675 $587,474 $(145,687)$6,476 $620,023 $23,794 $224,387 $868,204 
3


 Preferred stockCommon stockAdditional paid-in capitalDistributions in excess of earnings Accumulated other comprehensive lossTotal stockholders' equityNoncontrolling interests in investment entitiesNoncontrolling interests in Operating PartnershipTotal equity
Balance, December 31, 2020$171,085 $591 $472,747 $(112,356)$(8,868)$523,199 $488 $233,115 $756,802 
Net income— — — 5,198 — 5,198  811 6,009 
Unrealized cash flow hedge gains— — — — 1,685 1,685 — 591 2,276 
Realized cash flow hedge losses reclassified to net income— — — — 798 798 — 280 1,078 
Net proceeds from issuance of common stock— 7 8,974 — — 8,981 — — 8,981 
Restricted stock awards, net— 1 631 — — 632 — — 632 
Redemption of operating partnership units—  131 — — 131 — (134)(3)
Dividends declared on preferred stock— — — (2,887)— (2,887)— — (2,887)
Dividends and distributions declared on common shares and units ($0.15 per share and unit)
— — — (9,008)— (9,008)— (3,128)(12,136)
Balance, March 31, 2021$171,085 $599 $482,483 $(119,053)$(6,385)$528,729 $488 $231,535 $760,752 


See Notes to Condensed Consolidated Financial Statements.
4


ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)(Unaudited)
 Three Months Ended 
March 31,
 20222021
OPERATING ACTIVITIES  
Net income$12,276 $6,009 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation of buildings and tenant improvements13,638 12,599 
Amortization of leasing costs, in-place lease intangibles and below market ground rents - operating leases4,919 5,467 
Accrued straight-line rental revenue(1,492)(1,891)
Amortization of leasing incentives and above or below-market rents(264)(252)
Amortization of right-of-use assets - finance leases278 189 
Accrued straight-line ground rent expense48 33 
Unrealized credit loss provision (release)605 (55)
Adjustment for uncollectable lease accounts241 272 
Noncash stock compensation1,609 1,017 
Impairment charges47 3,039 
Noncash interest expense909 626 
Noncash loss on extinguishment of debt158  
Gain on real estate dispositions, net (3,717)
Change in fair value of derivatives and other(4,182)(393)
Changes in operating assets and liabilities:  
Property assets69 3,664 
Property liabilities(4,781)(6,649)
Construction assets(9,779)9,354 
Construction liabilities17,067 (19,063)
Interest receivable(784)(2,114)
Net cash provided by operating activities30,582 8,135 
INVESTING ACTIVITIES  
Development of real estate investments(28,675)(9,354)
Tenant and building improvements(727)(3,054)
Acquisitions of real estate investments, net of cash received(93,162)(28,067)
Dispositions of real estate investments, net of selling costs 9,156 
Notes receivable issuances(17,651)(7,532)
Notes receivable paydowns11,545 12,291 
Leasing costs(862)(670)
Contributions to equity method investments(8,092)(3,889)
Net cash used for investing activities(137,624)(31,119)
FINANCING ACTIVITIES  
Proceeds from issuance of common stock, net65,194 8,981 
Common shares tendered for tax withholding(773)(539)
Debt issuances, credit facility and construction loan borrowings284,113 17,590 
Debt and credit facility repayments, including principal amortization(218,354)(5,501)
Debt issuance costs(3,100)(1,710)
Acquisition of NCI in consolidated RE investments(3,901) 
Dividends and distributions(17,094)(11,679)
Net cash provided by financing activities106,085 7,142 
Net decrease in cash, cash equivalents, and restricted cash(957)(15,842)
Cash, cash equivalents, and restricted cash, beginning of period40,443 50,430 
Cash, cash equivalents, and restricted cash, end of period (1)
$39,486 $34,588 

See Notes to Condensed Consolidated Financial Statements.
5


ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Cash Flows (Continued)
(In thousands)(Unaudited)
Three Months Ended 
March 31,
20222021
Supplemental Disclosures (noncash transactions):
Increase in dividends and distributions payable$732 $3,344 
Decrease in accrued capital improvements and development costs(4,664)(1,689)
Operating Partnership units redeemed for common shares132 131 
Debt assumed at fair value in conjunction with real estate purchases156,071  
Noncontrolling interest in acquired real estate entity23,065  
Recognition of finance lease right-of-use assets 24,466 
Recognition of finance lease liabilities 27,940 

(1) 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, 2022March 31, 2021
Cash and cash equivalents$32,910 $24,762 
Restricted cash (a)
6,576 9,826 
Cash, cash equivalents, and restricted cash$39,486 $34,588 
(a) Restricted cash represents amounts held by lenders for real estate taxes, insurance, and reserves for capital improvements.





See Notes to Condensed Consolidated Financial Statements.

6


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, 2022, owned 76.7% 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 thereof.
 
As of March 31, 2022, the Company's property portfolio consisted of 57 stabilized operating properties and four properties either under development or not yet stabilized.

Refer to Note 5 for information related to the Company's recent acquisitions and dispositions of 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, 2021.
 
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

Certain items have been reclassified from their prior year classifications to conform to the current year presentation. The amounts previously classified as Interest expense on indebtedness and Interest expense on finance leases for the three months ended March 31, 2021 in the Condensed Consolidated Statement of Comprehensive Income are now included in a single line item as Interest expense. These reclassifications had no effect on net income or stockholders' equity as previously reported.

7


Recent Accounting Pronouncements

Reference Rate Reform

In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-04 Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848), which became effective on March 12, 2020 and generally can be applied through December 31, 2022. ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company is currently evaluating the effect that adopting this standard may have on its Consolidated Financial Statements.

Earnings Per Share

In August 2020, FASB issued ASU 2020-06 an update to ASC Topic 470 and ASC Topic 815, which became effective January 1, 2022. ASU 2020-06 simplifies the accounting for convertible instruments and removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception. This ASU also simplifies diluted earnings per share calculation in certain areas and provides updated disclosure requirements. The Company adopted ASU 2020-06 effective January 1, 2022 and the adoption did not have a material impact on the consolidated financial statements.

Other Accounting Policies

See the Company's Annual Report on Form 10-K for the year ended December 31, 2021 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 and construction businesses.

8


Net operating income of the Company’s reportable segments for the three months ended March 31, 2022 and 2021 was as follows (in thousands): 
 Three Months Ended March 31,
 20222021
Office real estate  
Rental revenues$17,023 $11,635 
Rental expenses4,140 2,875 
Real estate taxes1,504 1,358 
Segment net operating income11,379 7,402 
Retail real estate  
Rental revenues21,430 18,255 
Rental expenses3,501 2,836 
Real estate taxes2,238 2,027 
Segment net operating income15,691 13,392 
Multifamily residential real estate  
Rental revenues16,182 15,851 
Rental expenses5,028 5,121 
Real estate taxes1,662 1,921 
Segment net operating income9,492 8,809 
General contracting and real estate services  
Segment revenues24,650 35,563 
Segment expenses23,821 34,275 
Segment gross profit829 1,288 
Net operating income$37,391 $30,891 
 
Rental expenses represent costs directly associated with the operation and management of the Company’s real estate properties. Rental expenses include asset management expenses, property management fees, repairs and maintenance, insurance, and utilities.

General contracting and real estate services revenues for the three months ended March 31, 2022 and 2021 exclude revenue related to intercompany construction contracts of $8.6 million and $2.0 million, respectively, as it is eliminated in consolidation. General contracting and real estate services expenses for the three months ended March 31, 2022 and 2021 exclude expenses related to intercompany construction contracts of $8.5 million and $2.0 million, respectively.


9


The following table reconciles net operating income to net income, the most directly comparable GAAP measure, for the three months ended March 31, 2022 and 2021 (in thousands): 
 Three Months Ended March 31,
 20222021
Net operating income$37,391 $30,891 
Depreciation and amortization(18,557)(18,066)
Amortization of right-of-use assets - finance leases(278)(189)
General and administrative expenses(4,708)(4,021)
Acquisition, development and other pursuit costs(11)(71)
Impairment charges(47)(3,039)
Gain on real estate dispositions, net 3,717 
Interest income3,568 4,116 
Interest expense (9,031)(7,975)
Loss on extinguishment of debt(158) 
Change in fair value of derivatives and other4,182 393 
Unrealized credit loss (provision) release(605)55 
Other income (expense), net229 179 
Income tax benefit301 19 
Net income$12,276 $6,009 
 
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, including corporate office personnel compensation and benefits, bank fees, accounting fees, legal fees, and other corporate office expenses.

4. Leases

Lessee Disclosures

As a lessee, the Company has eight ground leases on seven properties. These ground leases have maximum lease terms (including renewal options) that expire between 2074 and 2117. 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. Five of these leases have been classified as operating leases and three of these leases have been classified as finance leases. The Company's lease agreements do not contain any residual value guarantees or material restrictive covenants.

Lessor Disclosures

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 renewal terms that can extend the lease term from one to 25 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.

10


Rental revenue for the three months ended March 31, 2022 and 2021 comprised the following (in thousands):
Three Months Ended March 31,
 20222021
Base rent and tenant charges$52,879 $43,598 
Accrued straight-line rental adjustment1,492 1,891 
Lease incentive amortization(173)(159)
Above/below market lease amortization437 411 
Total rental revenue$54,635 $45,741 

5. Real Estate Investment
 
Property Acquisitions

Exelon

On January 14, 2022, the Company acquired a 79% membership interest and an additional 11% economic interest in the partnership that owns the Exelon Building for a purchase price of approximately $92.2 million in cash and a loan to the seller of $12.8 million. The Exelon Building is a mixed-use structure located in Baltimore's Harbor Point and is comprised of an office building, the Constellation Office, that serves as the headquarters for Constellation Energy Corp., which was spun-off from Exelon, a Fortune 100 energy company, in February 2022, as well as a small multifamily component, 1305 Dock Street. The Constellation Office includes a parking garage and retail space. The Exelon Building was subject to a $156.1 million loan, which the Company immediately refinanced following the acquisition with a new $175.0 million loan. The new loan bears interest at a rate of the Bloomberg Short-Term Bank Yield Index ("BSBY") plus a spread of 1.50% and will mature on November 1, 2026.

The following table summarizes the purchase price allocation (including acquisition costs) based on relative fair value of the assets acquired for the two operating properties purchased during the three months ended March 31, 2022 (in thousands):
Exelon Building
Land$23,317 
Site improvements141 
Building194,916 
In-place leases53,705 
Above-market leases306 
Net assets acquired$272,385 

Ten Tryon

On January 14, 2022, the Company acquired the remaining 20% ownership interest in the entity that is developing the Ten Tryon project in Charlotte, North Carolina for a cash payment of $3.9 million. The Company recorded the amount as an adjustment to additional paid-in-capital.

Equity Method Investment

Harbor Point Parcel 3

The Company owns a 50% interest in Harbor Point Parcel 3, a joint venture with Beatty Development Group, for purposes of developing T. Rowe Price's new global headquarters office building in Baltimore, Maryland. The Company is a noncontrolling partner in the joint venture and will serve as the project's general contractor. During the three months ended March 31, 2022, the Company invested $8.2 million in Harbor Point Parcel 3. The Company has an estimated equity commitment of up to $42.0 million relating to this project. As of March 31, 2022 and December 31, 2021, the carrying value of the Company's investment in Harbor Point Parcel 3 was $20.9 million and $12.7 million, respectively. For the three months ended March 31, 2022, Harbor Point Parcel 3 had no operating activity, and therefore the Company received no allocated income.

11


Based on the terms of the operating agreement, the Company has concluded that Harbor Point Parcel 3 is a VIE and that the Company holds a variable interest. The Company does not have the power to direct the activities of the project that most significantly impact its performance, including activity as the managing member of the entity. Accordingly, the Company is not the project's primary beneficiary and, therefore, does not consolidate Harbor Point Parcel 3 in its consolidated financial statements. The Company has significant influence over the project due to its 50% ownership as well as certain rights and responsibilities relating to the development project. The Company's investment in the project is recorded as an equity method investment in the consolidated balance sheets.

6. Notes Receivable and Current Expected Credit Losses

Notes Receivable

The Company had the following notes receivable outstanding as of March 31, 2022 and December 31, 2021 ($ in thousands):
Outstanding loan amount (a)
Interest compounding
Development ProjectMarch 31,
2022
December 31,
2021
Maximum loan commitmentInterest rate
City Park 2$4,739 $ $20,594 13.0 %Annually
Interlock Commercial83,974 95,379 107,000 
(b)
15.0 %None
Nexton Multifamily24,180 23,567 22,315 11.0 %Annually
Total mezzanine & preferred equity112,893 118,946 $149,909 
Exelon note receivable12,834  
Other notes receivable7,343 7,234 
Notes receivable guarantee premium1,665 1,243 
Allowance for credit losses(1,178)
(c)
(994)
Total notes receivable$133,557 $126,429 
________________________________________
(a) Outstanding loan amounts include any accrued and unpaid interest, as applicable.
(b) This amount includes interest reserves.
(c) The amount excludes $0.4 million of Current Expected Credit Losses ("CECL") allowance that relates to the unfunded commitments, which was recorded as a liability under Other Liabilities in the consolidated balance sheet.

Interest on the notes receivable 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 generally added to the loan receivable balances. The Company recognized interest income for the three months ended March 31, 2022 and 2021 as follows (in thousands):
Three Months Ended March 31,
Development Project20222021
City Park 2$19 
(a)
$ 
Interlock Commercial2,826 
(a)
3,075 
(a)
Nexton Multifamily614  
Solis Apartments at Interlock 938 
Total mezzanine3,459 4,013 
Other interest income109 103 
Total interest income$3,568 $4,116 
________________________________________
(a) Includes recognition of interest income related to fee amortization.

City Park 2

On March 23, 2022, the Company entered into a $20.6 million preferred equity investment for the development of a multifamily property located in Charlotte, North Carolina. The investment has economic terms consistent with a note receivable, including a mandatory redemption or maturity on April 28, 2026, and it is accounted for as a note receivable. The Company's investment bears interest at a rate of 13%, compounded annually.
12



Management has concluded that this entity is a VIE. Because the other investor in the project, TP City Park 2 LLC, is the developer of City Park 2 Multifamily, the Company does not have the power to direct the activities of the project that most significantly impact its performance. Accordingly, the Company is not the project's primary beneficiary and does not consolidate the project in its consolidated financial statements.

Interlock Commercial

During February 2022, the Company received $13.5 million as a partial repayment of the Interlock Commercial mezzanine loan, which consisted of $11.1 million of principal and $2.4 million of interest, reducing the outstanding loan amount to $84.0 million.

Allowance for Loan Losses

The Company is exposed to credit losses primarily through its mezzanine lending activities and preferred equity investments. As of March 31, 2022, the Company had three mezzanine loans (including the Nexton Multifamily and City Park 2 preferred equity investments that are accounted for as notes receivable), each of which are financing development projects in various stages of completion or lease-up. Each of these projects is subject to a loan that is senior to the Company’s mezzanine loan. Interest on these loans is paid in kind and is generally not expected to be paid until a sale of the project after completion of the development.

The Company's management performs a quarterly analysis of the loan portfolio to determine the risk of credit loss based on the progress of development activities, including leasing activities, projected development costs, and current and projected mezzanine and senior construction loan balances. The Company estimates future losses on its notes receivable using risk ratings that correspond to probabilities of default and loss given default. The Company's risk ratings are as follows:

Pass: loans in this category are adequately collateralized by a development project with conditions materially consistent with the Company's underwriting assumptions.
Special Mention: loans in this category show signs that the economic performance of the project may suffer as a result of slower-than-expected leasing activity or an extended development or marketing timeline. Loans in this category warrant increased monitoring by management.
Substandard: loans in this category may not be fully collected by the Company unless remediation actions are taken. Remediation actions may include obtaining additional collateral or assisting the borrower with asset management activities to prepare the project for sale. The Company will also consider placing the loan on nonaccrual status if it does not believe that additional interest accruals will ultimately be collected.

On a quarterly basis, the Company compares the risk inherent in its loans to industry loan loss data experienced during past business cycles. The Company updated the risk ratings for each of its notes receivable as of March 31, 2022 and obtained industry loan loss data relative to these risk ratings. Each of the outstanding loans as of March 31, 2022 was "Pass" rated.

At December 31, 2021, the Company reported $126.4 million of notes receivable, net of allowances of $1.0 million. At March 31, 2022, the Company reported $133.6 million of notes receivable, net of allowances of $1.2 million. Changes in the allowance for the three months ended March 31, 2022 and 2021 were as follows (in thousands):
Three Months Ended March 31,
 20222021
Beginning balance $994 $2,584 
Unrealized credit loss provision (release)605 (55)
Extinguishment due to acquisition (788)