February 7, 2023

Armada Hoffler Plans Private Bond Sales After Securing First Credit Rating

By Mark Maurer at The Wall Street Journal

Real-estate investment trust Armada Hoffler Properties Inc. plans to raise financing through a series of private placements after securing its first credit rating, a move to wean itself off variable-rate debt as interest rates continue to climb.

Armada Hoffler, which invests in office, retail and multifamily properties, on Tuesday said it obtained a BBB rating from ratings firm DBRS Morningstar. The investment-grade rating marks the Virginia Beach, Va.-based company’s first designation from a credit rating firm since its founding in 1979 as a development firm. DBRS Morningstar cited the quality of Armada Hoffler’s multifamily properties and array of commercial tenants for the rating, among other reasons.

The move allows Armada Hoffler to raise funds through private debt placements, to convert its roughly $1.1 billion in debt from short-term variable rates to long-term fixed rates, as the Federal Reserve’s interest-rate hikes raise borrowing costs, Chief Financial Officer Matthew Barnes-Smith said.

“There’s a lot of interest-rate pressures in the current economic environment and we feel this is the platform to allow us to be set up for more stable and consistent output in the future,” he said.

Armada Hoffler, which is listed on the New York Stock Exchange, wants to reduce the proportion of its debt tied to variable rates from its current 55% to about 10% over the next five to 10 years, largely through private placements, Mr. Barnes-Smith said, adding the company could make the switch by taking out unsecured term loans.

In the first of these placements, the company aims to raise between $100 million and $200 million in the second or third quarters of this year, depending on Treasury rates and other market conditions, he said. Companies that raise private bonds avoid financial and legal requirements of the public market.

Shifting from variable debt would also free the business of much of the cost of hedging the related risks. Armada Hoffler, like many real-estate companies, faces surging costs to protect variable debt against jumps in interest rates through caps, which are derivatives contracts that receive a payment when an interest-rate benchmark exceeds a certain level. Lenders often require real-estate firms relying on floating rate debt to hedge their exposure with interest-rate caps.

“Long-term fixed-rate debt is the best way to go so we can focus on operating the business instead of the financial engineering of the derivative market, which is very volatile and very expensive right now,” Mr. Barnes-Smith said. Armada Hoffler will likely always have some variable debt, which it needs to take out construction loans, he said.

The company expects these transactions to reduce its earnings in the short term, but to shrink its long-term debt costs, Mr. Barnes-Smith said. “The value to the shareholders will be higher in our net operating income even though the earnings are slightly less,” he said.

Armada Hoffler reported an 83% rise in revenue to $122.8 million for the quarter ended Sept. 30, compared with the same period a year earlier, while net income more than quadrupled to $28.9 million. The company is set to report quarterly earnings on Feb. 14.

Shares of publicly traded office-focused REITs have broadly dropped amid concerns their growth prospects are weakened by a potential long-term decline in office demand. Armada Hoffler’s office portfolio represented 30.7% of its net operating income for the quarter ended Sept. 30, up from 21.2% from the prior-year period, a filing shows. That’s compared with 40.7% and 21.4% for the company’s retail and multifamily residential properties, respectively, sectors that have generally recovered more strongly than the office market since the Covid-19 pandemic.

Armada Hoffler is developing a new headquarters for asset manager T. Rowe Price Group Inc. in Baltimore, in partnership with real-estate developer Beatty Development Group LLP. In addition to acquiring properties, Armada Hoffler has development, construction and asset-management business lines.

“Do I think office is going to be toxic forever? No. I just think there’s going to be an elongated return,” Mr. Barnes-Smith said.


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