DBRS Morningstar Assigns Issuer Rating of BBB with a Stable Trend to Armada Hoffler, Limited Partnership

DBRS, Inc. (DBRS Morningstar) assigned an Issuer Rating of BBB with a Stable trend to Armada Hoffler, Limited Partnership (the Company or the Issuer). DBRS Morningstar notes that the rating is based on the credit risk profile of the consolidated entity, Armada Hoffler Properties, Inc., which includes the Company and its subsidiaries.

The rating is supported by (1) the Company's market position in the Mid-Atlantic region, (2) the asset quality of its multifamily portfolio, (3) the quality and diversification of its commercial tenant base, and (4) the longer-term weighted-average lease terms for its office and retail assets. The rating is constrained by (1) the exposure to general contracting income, which can cause cash flow volatility; (2) the geographic concentration of assets in the Virginia Beach, Virginia, and Baltimore markets; (3) elevated leverage metrics relative to the BBB rating category; and (4) the smaller portfolio size on an EBITDA and square footage basis relative to the BBB rating category.

The Stable trend considers DBRS Morningstar's expectations that (1) the Company will continue to fully maximize operations for its current real estate holdings while executing related and unrelated development projects, (2) the development of its related projects will be delivered and stabilized as scheduled, and (3) the Company continues to hedge its variable interest rate exposure. DBRS Morningstar expects the Company to use its revolving line of credit to fund its related development pipeline, which should improve the portfolio's office and multifamily quality in the long run. DBRS Morningstar projects that the increased debt use will elevate the Company's debt-to-EBITDA ratio to approximately 9.0 times (x) as of 2023 and 2024, relative to the 8.4x debt-to-EBITDA ratio as of the last 12 months (LTM) ended September 30, 2022. DBRS Morningstar also anticipates some EBITDA interest coverage ratio deterioration given the increased debt amounts and upcoming expirations of various interest rate derivative contracts. The EBITDA interest coverage ratio is projected to decrease to approximately 3.50x in YE2023 and to the low 3.00x range in YE2024, relative to 3.84x as of the LTM ended September 30, 2022.

DBRS Morningstar would consider a negative rating action should the debt-to-EBITDA ratio deteriorate to 9.3x on a sustainable basis, all else equal. Conversely, DBRS Morningstar may consider applying a positive one-notch overlay factor for low secured debt-to-total debt should the Company sustainably maintain the ratio below 40% and demonstrate an investment-grade-quality financial risk profile and a sufficient unencumbered stabilized asset pool value relative to unsecured debt (fully funded).

As of September 30, 2022, the Company had no rated senior unsecured debt outstanding; however, if the Issuer were to issue rated senior unsecured debt, DBRS Morningstar expects that the debt would be issued with terms and conditions consistent with market standards that would result in the rated senior unsecured debt ranking pari passu with all current and future unsecured credit facilities, which are satisfactory to DBRS Morningstar.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

Notes:
The principal methodology applicable to the rating is Rating Entities in the Real Estate Industry (April 20, 2022; https://www.dbrsmorningstar.com/research/395563).

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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