DBRS Confirms Allied Properties Real Estate Investment Trust at BB (low), Stable Trend

DBRS has today confirmed the Issuer Rating of Allied Properties Real Estate Investment Trust (Allied or the Trust) at BB (low) with a Stable trend.

The rating confirmation takes into consideration the following: Allied’s Class I office portfolio containing 5.2 million square feet (sq. ft.) of space mainly located in downtown Toronto (accounts for 50.7% of the GLA) and Montreal (38.7%) continues to perform reasonably well, with same-property growth in NOI, driven by higher rental rates on lease renewals and support from solid occupancy levels across its portfolio (97.3% as at Q3 2008). The Trust also has sound financial metrics with a low payout ratio in the 80% to 85% range and a debt to gross book value assets ratio of 49.7% as at September 20, 2008. These metrics compare well to other DBRS-rated REITs and partially offset Allied’s business risk profile.

Over the next three years, Allied has a minimal amount of debt maturing with no more than 5.6% in any one year over this period. Furthermore, Allied has more than sufficient liquidity to meet upcoming capital requirements, including modest expenditures on the Trust’s current development activities and minimal debt maturities. Subsequent to Q3 2008, Allied had available funds of $69.6 million, which consists of $45.3 million available on its credit facility, cash on-hand and new financing totalling $23.5 million. In the near term, DBRS expects the pace of property acquisitions to slow given the challenging credit conditions and expects that Allied will likely focus on its existing development projects (five properties) and other opportunities for growth, such as selectively creating additional space at existing properties through the Trust’s planned intensification program.

The current rating category incorporates risks that are associated with the following challenges: (1) Allied operates a smaller portfolio containing 5.2 million sq. ft., excluding development projects, in comparison with other DBRS-rated Canadian REITs that have portfolio consisting of 15 million to 20 million sq. ft.

(2) Allied has a number of concentration risks, including single-market exposure – downtown Toronto accounts for 50.7% of gross leasable area (GLA) and asset-type concentration with exposure to office fundamentals (office space accounts for 87.4% of the GLA). Allied’s office markets, particularly downtown Toronto, have a significant amount of new Class A office space (approximately 3 million sq. ft.) for completion in Q3 2009. Given this magnitude of new supply, the current economic downturn and its proximity to Allied’s downtown Toronto sub-markets, there could be a negative impact on the Trust’s portfolio metrics and overall office fundamentals. In addition, Allied has a large amount of lease maturities (46% of GLA) set to expire by the end of 2011, which could expose the Trust to releasing risk over this period.

(3) Allied’s top ten tenants are of lower creditworthiness, exposing the Trust to counterparty risk. This concern is somewhat mitigated by Allied’s good property locations and some degree of diversification among its top ten tenants, with no one tenant accounting for more than 6% (CGI Inc.) of total rental revenue.

Overall, DBRS believes Allied’s conservative payout ratio, staggered debt maturities and solid liquidity position provides underlying support to the Trust’s credit profile in light of the challenging credit market conditions and potentially weakening office fundamentals in 2009.

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

The applicable methodology is Rating Real Estate which can be found on our website under Methodologies.

This is a Corporate rating.