Hot Armada Hoffler IPO not so hot, some analysts say

Armada Hoffler Properties, a real estate investment trust, raised $190 million by offering 16.5 million shares at $11.50 within the original price range May 8.

The company’s stock is listed on the New York Stock Exchange under the symbol AHH.

Some analysts were bearish about the company’s stock.

Seeking Alpha

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.

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.

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.

Kenneth Fisher Guru Analysis for Armada Hoffler Properties,Inc.

Detailed Analysis

Guru Score: 40%

PRICE/SALES RATIO: [FAIL] The prospective company should have a low Price/Sales ratio. Non-cyclical stocks with Price/Sales ratios > 3 should never be purchased, however they can be held depending on the investor's risk aversion. AHH's P/S ratio of 3.18 Based on trailing 12 month sales, is above 3, which is considered very unfavorable by this methodology. Based on this ratio, the stock is quite risky, however if risk does not bother you much, consider holding the stock until the P/S ratio approaches 6.TOTAL DEBT/EQUITY RATIO: [FAIL] 
Less debt equals less risk according to this methodology. The Debt/Equity ratio for AHH is not available currently. Hence, this variable cannot be analyzed at the present time.PRICE/RESEARCH RATIO: [PASS] 
This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. AHH is neither a Technology nor Medical company. Therefore the Price/Research ratio is not available and, hence, not much emphasis should be placed on this particular variable.

PRELIMINARY GRADE: No Interest in AHH At this Point

Is AHH a "Super Stock"? NO
Price/Sales Ratio: [FAIL] The Price/Sales ratio is the most important variable according to this methodology. The prospective company should have a low Price/Sales ratio. AHH's Price/Sales ratio of 3.18 does not pass this criterion.LONG-TERM EPS GROWTH RATE: [PASS] 
This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. AHH's inflation adjusted EPS growth rate of 205.14% passes this test.FREE CASH PER SHARE: [PASS] 
This methodology looks for companies that have a positive free cash per share. Companies should have enough free cash available to sustain three years of losses. This is based on the premise that companies without cash will soon be out of business. AHH's free cash per share of 17.35 passes this criterion.
THREE YEAR AVERAGE NET PROFIT MARGIN: [FAIL] This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. AHH's three year net profit margin, which averages 4.24%, does not pass this criterion.