DBRS Confirms Summit REIT at BBB (low) with a Stable trend

Dominion Bond Rating Service (DBRS) has today confirmed the rating of Summit Real Estate Investment Trust’s (Summit or the Trust) Senior Unsecured Debentures at BBB (low) with a Stable trend. This confirmation follows ING Real Estate Canada’s (ING Canada) announcement to acquire Summit (the Transaction) for approximately $3.4 billion, including $1.2 billion of assumed debt of the Trust, and resolves DBRS’s Under Review with Developing Implications, placed on the rating on August 31, 2006.

ING Real Estate N.V. and ING Industrial Fund will each own a 50% interest in ING Canada through equity investments of approximately $840 million each. Although there are no direct guarantees provided to the Trust, DBRS views this ownership as favourable to the rating.

The completion of the Transaction will include the following steps, which the rating has taken into consideration:

(1) The Transaction will result in a comprehensive revaluation of the Trust’s assets to reflect the equity value of the offer price ($30.00 per unit). This accounting method is in accordance with Canadian GAAP and will effectively modify the Trust’s balance sheet ratios to reflect the new book values. (A pre-comprehensive revaluation debt-to-gross book value ratio drops from 50% to approximately 34% on a post-comprehensive revaluation basis).

(2) To complete the restructuring of the Transaction, Summit will use additional debt, including a $530 million bridge facility, such that the Trust’s debt-to-gross book value ratio is expected to temporarily rise from 34% (post-comprehensive revaluation) to approximately 50% pro forma (January 2006) with Summit’s EBITDA coverage ratio falling to the 2.2 times range. While the Trust’s EBITDA interest coverage is moderately below historical levels and at the lower end range for the rating category, the current rating reflects DBRS’s expectation that Summit will maintain an EBITDA coverage ratio at or above 2.2 times.

In addition, the Trust is expected to operate with a target debt-to-gross book value ratio band in the 40% to 45% range. Management has indicated that they plan to monetize the Trust’s retail portfolio in the near term and use these proceeds to repay debt associated with the restructuring to meet the aforementioned target debt range.

Summit’s core strength centres on its size as the largest landlord of light industrial property in Canada (30.9 million sq. ft. as at Q2 2006) with a significant presence in several key domestic industrial markets, including the GTA (represents 45% of NOI), Edmonton (15%), Montreal (13%) and Calgary (12%). DBRS expects Summit to continue to build its presence in these markets through property acquisitions, development/expansion activity and by acquiring land positions as evidenced by the Trust’s recent activity in Alberta. Although further exposure to on-balance-sheet property development/land positions could modestly increase Summit’s business risk profile, DBRS believes this should be manageable as the Trust’s measured expansion in this type of activity will likely consist of property strategically situated in key Canadian industrial markets.

Summit’s portfolio metrics remain stable with high occupancy levels (95.7% as at Q2 2006) and generally steady average rental rates across the Trust’s markets with notable strength occurring in the Calgary and Edmonton markets. Summit’s consistently high occupancy levels provide evidence of good property locations in sound economic regions and the underlying stability of the light industrial asset class.

The Trust has a diverse tenant base with over 3000 tenants that are representative of broad economic activity.

These positive rating factors are counterbalanced by the following:

(1) Summit has geographic concentration in the GTA (45% of NOI on an annualized basis as of Q2 2006), which exposes the Trust to local economic conditions and industrial fundamentals within this market.

(2) Due to the short-term leases typical of the industrial asset class, Summit has greater exposure to rental rate volatility compared with other REITs with longer lease terms to maturity. DBRS notes, however, that rental rates for the industrial asset class have been generally more stable compared with other segments of real estate, particularly office.

(3) Summit’s pro forma EBITDA interest coverage of 2.20 times is at the lower end range for the rating category.

Note:
All figures are in Canadian dollars unless otherwise noted.