Morningstar DBRS Changes Trend to Stable from Negative and Confirms Issuer Rating on Armada Hoffler, Limited Partnership at BBB

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

KEY CREDIT RATING CONSIDERATIONS
The Stable trend reflects the improving leverage profile and the more diversified real estate portfolio following the completion and delivery of Allied, leading to an improvement in the Diversification business risk assessment factor. The Allied is a mixed-use, 312-unit multifamily, retail, and parking garage asset under development in Baltimore, scheduled to be completed in Q1 2025 and stabilized by Q3 2026. Upon stabilization, the asset is expected to be a top asset in the portfolio by net operating income (NOI) contribution and increase geographical and asset type diversification. The enhanced business risk assessment factor allows greater financial flexibility within the respective credit rating category. The improving leverage profile is largely the result of a $103.5 million net proceed equity raise in September 2024 with funds used to repay debt.

CREDIT RATING DRIVERS
All else equal, Morningstar DBRS would consider a negative credit rating action should Total Debt-to-EBITDA remain higher than 9.3 times (x) and EBITDA Interest Coverage deteriorate of less than 2.33x on a sustained basis. All else equal, Morningstar DBRS would consider a positive credit rating action should Total Debt-to-EBITDA improve to 7.3x or better and EBITDA Interest Coverage is 2.67x or better on a sustained basis. Morningstar DBRS may also consider a positive credit rating action should the Total Secured Debt to Total Debt ratio reach and sustainably remain less than 40%.

FINANCIAL OUTLOOK
Morningstar DBRS projects the Total Debt-to-EBITDA to improve to the high-8.0x range by YE2024 and slightly deteriorate to the 9.0x range by YE2025 before improving to the 8.0x range by YE2026. Total Debt-to-EBITDA largely performed in line with Morningstar DBRS' prior expectations through September 30, 2024 (9.2x as of the last 12 months ended September 30, 2024) and is forecast to perform better than previous expectations for YE2024. Total Debt-to-EBITDA is expected to fluctuate in the near term given various debt repayments, increased mortgage loans, and growing EBITDA driven by the stabilization of newly constructed assets and same-property NOI growth.

EBITDA Interest Coverage is projected to remain in the low-2.00x range through YE2026 (relative to LTM September 30, 2024, EBITDA Interest Coverage of 2.09x) as EBITDA growth is expected to be offset by greater interest expenses. The Company has high variable debt exposure, which is largely offset by various floating-to-fixed rate swaps.

CREDIT RATING RATIONALE
The credit rating confirmation is supported by (1) the Company's market position in the Mid-Atlantic region, (2) the asset quality of its multifamily and office 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 credit 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 credit rating category; and (4) the smaller portfolio size on EBITDA and square footage basis relative to the BBB credit rating category.

As of September 30, 2024, the Company had no rated senior unsecured debt outstanding; however, if the Issuer were to issue rated senior unsecured debt, Morningstar DBRS 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 Morningstar DBRS.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of the Company, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of the Company, the FRA factors are considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of the Company, the BRA carries greater weight than the FRA.

Notes:
All figures are in U.S. dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Entities in the Real Estate Industry (April 15, 2024), https://dbrs.morningstar.com/research/431170

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
-- Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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