DBRS Comments on First Capital Realty’s Announcement to Acquire Units of Allied Properties REIT

DBRS today notes that First Capital Realty Inc. (First Capital or the Company), rated BBB with a Stable trend, has an agreement to acquire from institutional investors an aggregate of 1,766,800 units (the Units) of Allied Properties Real Estate Investment Trust (Allied or the Trust). DBRS’s Issuer Rating for Allied is BB (low) with a Stable trend and its Stability rating is STA-4 (middle)

In exchange, First Capital will issue common shares at a ratio of 0.81 First Capital shares per Unit. Together with the Units currently owned by First Capital, the Company will own or exercise control over 3,453,100 units in Allied, representing approximately 11% of the Trust’s issued and outstanding units.

While First Capital does not currently intend to initiate a formal take-over bid for Allied, the Company has indicated that it would like to engage in discussions with the Trust to explore potential business opportunities. Overall, DBRS believes that if a business combination between Allied and First Capital were to materialize, the credit implications for First Capital could be neutral to slightly positive from a business risk perspective and depending on the financial arrangements. Note that the market capitalization of Allied is only 25% of First Capital’s market capitalization.

DBRS believes that Allied’s real estate portfolio provides several strategic benefits as well as favourable long-term prospects that could enhance First Capital’s business risk profile. These include the following:

(1) An increased presence in Toronto’s downtown east and west markets where Allied has established a prominent position in the Class I “brick and beam” office market niche with over 2.6 million sq. ft. of office (80.5%) and ancillary retail (19.5%) space. (Toronto accounts for 50.7% of the Trust’s gross leaseable area (GLA) as at Q3 2008). This could provide an opportunity for First Capital to continue to build on its local presence this market, which has significant urban retail potential and favourable long-term trends, including a growing population base and a demographic shift toward urban living. In addition, Allied’s portfolio offers some additional benefits through increased diversification by asset type (primarily office), property and tenant.

(2) Allied’s portfolio also offers several channels for portfolio growth, including value-added programs (condominium developments and parking facilities) and potential development (currently five projects) and urban intensification projects. DBRS notes that a majority of Allied’s properties have considerably less GLA than what is permissible under their current zoning.

(3) Allied’s Class I space, featuring high ceilings and efficient floor space layouts, can accommodate a wide range of business tenants and could provide unique retail leasing opportunities. In particular, First Capital could leverage off its retail leasing expertise to accommodate those tenants seeking desirable urban infill locations, which could lead to higher tenant retention rates and strengthening tenant relations over time.

(4) From a financial perspective, with Allied leverage of approximately 51% and its well-staggered debt maturity profile, First Capital’s pro forma leverage, if the Company were to proceed with a share-for-share unit exchange, would be neutral.

Notes:
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.