DBRS Confirms Alexis Nihon REIT at BB (low) with a Stable Trend
Real EstateDominion Bond Rating Service (DBRS) has today confirmed the ratings of Alexis Nihon Real Estate Investment Trust (Alexis Nihon, or the Trust) at BB (low) with a Stable trend.
Some of the challenges DBRS takes into consideration for Alexis Nihon’s current rating are as follows:
(1) The Trust has market concentration risk and exposure to oversupply issues, with 55 properties mainly located in the Greater Montreal Area.
(2) The Trust’s portfolio remains at the smaller end compared with other Canadian REITs, with approximately 8.3 million square feet of net leasable area as at Q1 2006. In addition, the Trust is vulnerable to specific performance with two key properties, Place Alexis Nihon and Centre Laval, accounting for 15.7% and 8.4% of the total portfolio leasable area, respectively.
(3) Alexis Nihon’s balance sheet leverage has become more aggressive to support portfolio growth and cash distributions. As at Q1 2006, the Trust had a debt-to-gross book value ratio of 60.4%, which is at the upper end of its peer range. This has also deteriorated EBITDA interest coverage to 2.23 times for the LTM Q1 2006; however, this metric remains reasonable for the rating level. DBRS expects the Trust to operate at a more appropriate level within the 55% to 60% range considering the underlying portfolio risks.
Despite these rating constraints the Trust’s credit profile is underpinned by the following:
(1) The Trust has a well-maintained real estate portfolio comprising 8.3 million square feet of Class A and Class B midrise office buildings, stable light/flex industrial space, midmarket retail properties and a small residential component as at Q1 2006. Over the past few years, the Trust has focused its growth in the industrial segment and, more recently, in the retail segment by acquiring six retail properties for $15 million at an average cap rate of 8.1% post-Q1 2006. Going forward, these segments should provide greater stability to cash flow compared with office and generally require less cost to re-tenant the space.
(2) Portfolio occupancy levels remain reasonably high at 91.9% as at Q1 2006. The Trust achieved modest same-portfolio net operating income growth of 1.5% mainly due to occupancy gains in the industrial (+4.3%) retail portfolio (+2.8%) and incremental cash flow from redeveloped retail space on a year-over-year basis.
(3) Alexis Nihon’s scheduled lease maturities are manageable over the next five years (averaging 12.4% in each year), providing reasonable support to current cash flow with an average lease term to maturity of 4.55 years as at Q1 2006. Although the Trust’s office markets remain soft, office lease maturities are minimal at 4% for the remainder of 2006. However, the Trust has a moderate amount (32%) of office space maturing over the 2007–2008 period, which could put pressure on cash flow and increase leasing costs if conditions remain soft.
Overall, DBRS expects the credit profile to remain stable throughout 2006 because of the underlying support from a manageable lease profile and gradually improving leasing conditions for the Trust’s markets in 2006.
Notes:
All amounts are in Canadian dollars unless otherwise noted.
This rating is based on public information.