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 as the Trust continues to maintain a solid credit profile with support from its conservative balance sheet, significant liquidity position, good access to low-cost Canada Mortgage and Housing Corporation (CMHC)-insured debt, and the largest multi-family residential portfolio in Canada, consisting of over 260 properties and 36,652 rental units.

The rating confirmation also reflects the fact that Boardwalk’s portfolio continues to perform reasonably well and has benefited from lower operating and utility costs and the favourable performance of its Saskatchewan, British Columbia and Québec properties, despite soft apartment fundamentals in the Trust’s largest markets, including Edmonton (35.8% of Q3 2009 net operating income (NOI)) and Calgary (18.3% of Q3 2009 NOI). These predominantly oil and gas-based economies continue to experience high unemployment together with downward pressure on apartment market rental rates.

Recognizing this, Boardwalk’s management has proactively focused on increasing occupancy levels through rental rate adjustments and incentives. As at Q3 2009, portfolio occupancy held relatively steady at a solid 95.5%, with support from its properties in Calgary and Edmonton showing recent improvement in occupancy levels. DBRS notes that portfolio occupancy advanced into the 96% range during Q4 2009.

Going forward, Boardwalk’s markets in Alberta will likely continue to experience modest downward pressure on market rental rates until the oil and gas sector shows further signs of recovery. DBRS, however, takes comfort in the fact that the degree of decline in market rental rates for its Alberta markets appears to be slowing and should begin to stabilize throughout 2010, at which time management may consider increasing rents. However, DBRS believes any modest rental rate appreciation will likely be offset by higher operating costs during 2010.

Overall, DBRS believes that these market risks and near-term pressure on cash flow growth 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 $200 million of cash on hand, an unused credit facility totalling $198 million and unencumbered assets (2,125 rental units excluding 855 rental units that are pledged against the Trust’s undrawn credit facility).

(2) Boardwalk has access to attractive financing, with spreads of 100 to 110 basis points (bps) on 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 99% 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 2010 and expects the Trust to continue to benefit from favourable refinancing activity in 2010.

(3) 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 currently high property valuations. In the absence of property acquisitions, Boardwalk will likely use available financial flexibility to fund debt reduction and its unit repurchase program while remaining 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.