DBRS Confirms ING Summit Industrial Fund LP at BBB with a Stable Trend

DBRS has today confirmed the Senior Unsecured Debentures of ING Summit Industrial Fund LP (ING Summit or the Company) at BBB, with a Stable trend. The rating confirmation is based on DBRS’s expectation that ING Summit will continue to operate with conservative credit metrics, improve its financial strength and take appropriate measures to protect its credit risk profile given the potential for further deterioration operating metrics throughout 2009.

The rating also takes into consideration that, despite the current economic downturn and its resulting pressure on industrial fundamentals, ING Summit’s portfolio occupancy levels (93.5% as at Q1 2009) remain within a historical operating range (90% to 96%) and the Company continues to achieve good tenant retention rates (72.2% as at Q1 2009) with higher rental rates on lease renewals, mainly in its Alberta markets, where market rental rates remain above current in-place rates. For the remainder of 2009, lease maturities are modest (7.8%) and well spread out across Canada, which should mitigate some of the Company’s exposure to a challenging leasing environment, particularly in the Greater Toronto Area (GTA). In addition, tenant bankruptcies to date have been manageable and have been mainly related to the challenging automotive sector in Ontario. DBRS notes that ING Summit’s tenant profile has approximately 10% exposure to tenants related to the automotive sector in markets across Canada and has no exposure to heavy or noxious manufacturing activities.

Nevertheless, DBRS expects that ING Summit’s cash flow and occupancy levels will remain under pressure throughout 2009, particularly from properties in the GTA and Ontario markets due to a decline in broader economic activity and new supply imbalances within these markets. DBRS’s rating analysis and estimates incorporate the fact that ING Summit could achieve cash flow or operate with debt levels that support an EBITDA interest coverage ratio in the 2.25 times range (includes capitalized interest) in 2009. DBRS notes that this level of interest coverage would be representative of the low point of the cycle and is at the lower end of the range acceptable for the current rating category. The rating confirmation also incorporates DBRS’s expectation that ING Summit is committed to enhancing its financial flexibility and liquidity position by achieving a positive free cash flow position. In addition, DBRS believes ING Summit’s management would consider reducing its distribution for a certain period of time in order to bolster financial strength. That said, ING Summit will need to refinance approximately $79.3 million of mortgages (estimated loan-to-value (LTV) ratio of 39%), $87.5 million of Series C, senior unsecured debentures that mature in December 2009, and $160.3 million of bank debt. The Company also has development commitments totalling $31.4 million due in 2009.

DBRS does not expect the Company to encounter any difficulties in refinancing or repaying these amounts, given the low LTV on the mortgages and available funds totalling $143.8 million, including un-drawn amounts on its bank facility and a $78 million loan receivable (due on demand). DBRS also believes that ING Summit has sufficient funding options available to meet the remaining obligations. These options include: unencumbered assets with an approximate value of $200 million, the intention to arrange new bank debt totalling between $200 million and $225 million, potential up-financing on maturing mortgages and, to a lesser extent, asset sales. However, for the purposes of its analysis, DBRS has given little weighting to the success of any asset sales at this time due to current market conditions.

Overall, DBRS believes 2009 should represent the bottom of the cycle for industrial fundamentals – as we expect the economy to begin to recover toward the end of the year – and the size and scale of ING Summit’s portfolio, diverse tenant base and good property locations in large Canadian cities should keep the Company well positioned to recover as the economic climate improves. If the Company performs as we expect and follows through with adequate financial flexibility while achieving a positive free cash flow position, the trend should remain Stable. Should credit metrics trend away from levels appropriate for the current environment and rating (i.e., below the EBITDA interest coverage range of 2.25 times) caused by weaker-than-expected operating performance, inadequate debt refinancing and/or a deeper/longer than expected economic downturn (which would erode the Company’s capacity to manage its credit metrics), the rating and/or trend would be pressured.

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.