DBRS Confirms Boardwalk REIT at BBB with a Stable Trend

DBRS has today confirmed the Senior Unsecured Debentures of Boardwalk Real Estate Investment Trust (Boardwalk or the Trust) at BBB with a Stable trend. The Trust’s credit profile takes into consideration the fact that Boardwalk continued to exhibit growth in same property net operating income (NOI) of 5.6% during Q4 2008, with its Saskatchewan and Edmonton properties mainly contributing to this growth. While the Trust has benefited from its high exposure to the exceptionally strong Edmonton (35.2% of NOI) and Calgary (19.8% of NOI) markets in recent years, rental rate growth has moderated, with the spread between in-place rental rates and market rates narrowing significantly over the last 12 months.

The Trust’s portfolio occupancy rates, however, have remained fairly stable, which highlights the quality and location of Boardwalk’s properties and the overall stability of the multi-residential sector in Canada. These results are also indicative of management’s ability and willingness to continuously react to changing market rents. DBRS expects Boardwalk to manage its portfolio occupancy rates at a level that is in line with the historical range of 94% to 96%.

Going forward, Boardwalk’s Alberta markets will likely continue to experience downward pressure on market rental rates and, until the oil and gas sector shows signs of recovery, DBRS expects there to be limited potential for further rental rate growth in the Trust’s portfolio. In addition, DBRS acknowledges that the Trust’s Alberta markets could experience increasing pressure on market rents, depending on the response to new condominium rental supply and the potential impact of a prolonged economic downturn on the province’s oil and gas sector. The Trust, however, is expected to achieve modest cash flow growth from lower operating costs and from potentially lower interest rates on refinancing activity in 2009.

Overall, DBRS believes that these concentration and market risks are manageable and are mitigated by the following factors, which provide underlying support to the Trust’s credit profile.

(1) Boardwalk maintains a low payout ratio and a strong liquidity position, with approximately $123 million of cash on hand, an unused credit facility totaling $200 million and unencumbered assets (1,800 rental units) totaling $256 million as at Q4 2008.

(2) Boardwalk has access to attractive financing, with spreads of 130bps to 180bps on Canada Mortgage Housing Corporation (CMHC) financing. DBRS notes that this source of capital continues to positively differentiate Boardwalk from other real estate segments in terms of availability of capital. Approximately 98% of the Trust’s mortgages are CMHC insured, which generally have lower refinancing risk and lower interest rates than non-government-backed mortgages. DBRS does not anticipate any refinancing challenges on upcoming debt maturities in 2009 and expects the Trust to continue to benefit from favourable refinancing.

(3) In 2009, DBRS expects Boardwalk’s financial profile to remain fairly stable, with EBITDA interest coverage ratios of around 2.25 times. In addition, DBRS does not expect any meaningful property acquisitions given current property valuations and the challenging capital markets. Boardwalk’s management believes the Trust’s unit repurchase program currently provides better value than the acquisition market. As a result, Boardwalk will likely use proceeds from the sale of selective non-core assets, cash on-hand and or modest incremental debt to fund this program while within DBRS’s parameters for the Trust’s current rating category.

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.