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. DBRS notes that ING Real Estate NV (ING Real Estate) and ING Industrial Fund (IIF) have been reviewing their options with respect to their investments in ING Summit. DBRS also notes that ING Summit’s rating is based solely on the performance of the Company and does not reflect any direct support from ING Real Estate or IIF. As a result, a change of ownership would not necessarily have an impact on the rating. In the event of an ownership change, DBRS would consider the future business and financial plans. DBRS also notes that if a change of ownership were to occur, bondholders are further protected by a change of control provision for the senior unsecured debentures.

The rating confirmation reflects the fact that ING Summit has made progress in improving its liquidity and financial flexibility positions, mainly by lowering its cash distribution to a more sustainable level and by utilizing proceeds from asset dispositions to fund debt reduction. As a result, ING Summit continues to achieve a positive free cash flow position ($6.9 million for the LTM ended March 31, 2010) and to operate with conservative credit metrics, although EBITDA interest is close to the low end of the range for the rating category. In 2010, ING Summit will need to refinance or repay approximately $226.5 million of mortgages (estimated loan-to-value (LTV) ratio in the 40% to 45% range). The Company also has a small amount of development commitments totalling $8.2 million due in 2010. 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 $51 million, including undrawn amounts on its bank facility and $1.2 million in cash balances. DBRS also believes that ING Summit has sufficient funding options available to meet the remaining obligations. These options include financing unencumbered assets, potential up-financing on maturing mortgages, utilizing additional capacity of the Company’s credit facilities, non-core asset sales, and $66 million of restricted cash expected to be released during 2010.

The rating also reflects the fact that despite the near-term potential for further downward pressure on cash flow levels and portfolio occupancy rates, particularly in the Greater Toronto Area (GTA), overall industrial fundamentals and leasing activity appear to be gradually improving. During the first half of 2010, ING Summit experienced an increase in leasing activity and improving results, including higher tenant retention rates in April (84%) and May (88%) and modestly higher average rental rates on leasing activity in Q2 2010 (a 3% increase in average rental rates above Q1 2010). The Company has also made good progress in leasing up current vacancies.

Although DBRS believes that these achievements are encouraging, ING Summit has a large amount of lease maturities over the next several years, averaging 14.3% of space set to mature per year before the end of 2012. In addition, DBRS notes that of the 12.3% of total space maturing for the remainder of 2010, the GTA and southwest Ontario markets account for approximately 60% of this space, which could expose the Company to re-leasing risk in the near term. DBRS expects more robust results from the Company’s western Canadian markets to partially offset weakness in the GTA. DBRS notes that in-place rental rates in Edmonton and Calgary are generally still below current market rates. Overall, DBRS takes comfort in the fact that new industrial supply and development remains limited across the Company’s core markets, which should provide further support to recovering industrial market rental rates and occupancies. In addition, 75% of ING Summit’s leases have built-in contractual rent steps that contribute to average annual rental rate growth of 1.5% to 2%.

Overall, DBRS expects ING Summit to continue to operate with a prudent level of financial strength in 2010 and we expect the economy and overall industrial fundamentals to show further signs of recovery over the next several quarters. In addition, the size and scale of ING Summit’s portfolio, diverse tenant base and good property locations in large Canadian cities should keep it well positioned 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, increasing vacancy levels and/or a deeper or 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.