DBRS Confirms Allied Properties REIT at STA-4 (middle)

DBRS has today confirmed the stability rating of Allied Properties Real Estate Investment Trust (Allied or the Trust) at STA-4 (middle), as the Trust maintains a sound financial profile with support from its favourable credit metrics and a reasonable payout ratio (90% for the 12-month period ended Q3 2009) and liquidity position.

The rating confirmation reflects the fact that Allied continues to operate with reasonable liquidity consisting mainly of approximately $70 million available on its revolving credit facility (reflecting the Trust’s $125 million equity issuance on October 2, 2009, and debt financings post-Q3 2009). DBRS believes that Allied’s credit facility and good access to mortgage markets is more than sufficient to fund its modest near-term capital requirements. In addition, the Trust has limited exposure to refinancing over the next couple of years, with only a single mortgage ($7 million) maturing in 2010 and no more than 5.8% of total mortgages maturing before the end of 2011.

DBRS believes that Allied has appropriately managed its balance sheet with conservative debt levels (47.8% debt-to-gross book value assets pro forma to include the aforementioned equity issuance) and good financial flexibility achieved through a reasonable payout ratio, which should position the Trust well for growth opportunities in 2010, including its current development/intensification projects and potential property acquisitions. Allied has indicated that it plans to make acquisitions in the $100 million to $125 million range during 2010. Going forward, DBRS expects Allied to operate with debt levels in the 50% to 55% range on a debt-to-gross book value assets basis, which is reflected in the current rating category.

The rating confirmation also takes into consideration Allied’s well-maintained Class I office portfolio containing 5.5 million square feet (sq. ft.) of space mainly located in downtown Toronto (accounts for 50.6% of the gross leasable area (GLA)) and Montréal (37.2%). The portfolio continues to perform well in light of a challenging economic environment and weakening office fundamentals. Allied has achieved good occupancy levels across its portfolio (96.2% as at Q3 2009) and higher rental rates on 72% of the space renewed or replaced (503,596 sq. ft.) during the first nine months of 2009.

DBRS expects office fundamentals to remain weak in 2010 and Allied’s office markets, particularly downtown Toronto, could continue to experience the effects of a significant amount of new Class A office space (approximately 3.2 million sq. ft.) becoming available in the years ahead. Given the magnitude of this new supply and its proximity to Allied’s downtown Toronto sub-markets, in the current challenging economic climate 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 (52.3% of GLA) that are set to expire by the end of 2012, which could expose the Trust to releasing risk over this period. DBRS notes that Allied has made some progress in addressing several large lease maturities that come due over the next couple of years. Post-Q3 2009, the Trust renewed Desjardins’ lease of 192,157 sq. ft. at 425 Viger Avenue West in Montréal for a term of five years (December 31, 2017) at net rental rates above in-place rents. The Trust is also currently negotiating CGI Inc.’s 280,000 sq. ft. lease at Cité Multimédia in Montréal.

The current rating is limited by the following challenges: (1) Allied operates a smaller portfolio consisting of 5.5 million square feet, excluding development projects, in comparison with other DBRS-rated Canadian REITs that have portfolios consisting of 15 million to 20 million square feet.

(2) Allied has a number of concentration risks, including single-market exposure – downtown Toronto accounts for 50.6% of GLA – and asset-type concentration with exposure to office fundamentals (office space accounts for 88.1% of GLA).

(3) Allied’s top ten tenants are of lower creditworthiness, and this exposes the Trust to counterparty risk. This concern is, however, 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 5.5% (CGI Inc.) of total rental revenue.

Overall, DBRS believes that Allied’s conservative balance sheet, minimal near-term debt maturities and good financial flexibility provides underlying support to the Trust’s stability profile in light of the potential for further weakening of office fundamentals in 2010.

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.