DBRS Confirms Boardwalk REIT at BBB, 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 rating confirmation takes into consideration prudent balance sheet management and continued focus on improving occupancy rates while recognizing a competitive multi-family residential environment in the Trust’s Alberta markets (accounts for 60% of total net operating income, or NOI). The competitive conditions in Alberta led to lower rental revenue and higher operating expenses in 2010, which contributed to negative same-portfolio NOI growth (Calgary -9.6% and Edmonton -5.5%) for the nine months ended September 30, 2010. The Trust’s remaining markets have generally achieved favourable results in 2010.

Boardwalk’s management has proactively focused on increasing occupancy levels through the use of tenant incentives. Boardwalk’s occupancy levels increased to 97% as at Q3 2010 from 95.5% in the comparable period 2009. From a financial profile standpoint, Boardwalk has appropriately managed its balance sheet in an adequate fashion for the rating category and the challenging operating environment. Boardwalk also has a significant liquidity position, with $405 million available in cash and bank lines. This is well in excess of near-term obligations, including the $112 million of Series A senior unsecured debentures maturing in January 2012. The Trust maintains a conservative payout ratio and used free cash flow and proceeds from non-core asset dispositions to fund a special distribution ($26.3 million), pursue modest debt reduction, and finance its trust unit repurchase program in 2010. Coverage ratios have remained fairly stable in 2010 and will likely continue to benefit from lower interest rates on refinanced debt.

Boardwalk’s BBB rating remains in line with DBRS’s real estate industry rating and is underpinned by the following credit strengths: (1) its focus on the relatively more stable multi-family residential segment; (2) it is the largest owner and operator of multi-family residential rental units in Canada; (3) diversification by property and tenants; and (4) access to low-cost Canada Mortgage and Housing Corporation-insured debt. The rating category also reflects the following challenges: (1) market concentration in Alberta; (2) single asset class exposure; (3) limited external growth prospects; and (4) a debt structure that primarily consists of secured debt, which ranks ahead of the senior unsecured debentures.

Going forward, DBRS’s stable outlook reflects the fact that rental conditions in Alberta are showing signs of stabilizing and the Trust’s use of rental incentives are beginning to moderate. These factors, combined with improving economic and employment conditions in Alberta, should slowly help support rental rate growth in the province toward the latter part of 2011.

In terms of financial profile, DBRS expects Boardwalk’s debt levels to remain relatively stable and its EBITDA interest coverage in the 2.25 times range, which is commensurate with the current rating category. Any near-term improvement in this metric will likely be due to lower interest rates on refinanced debt. DBRS does not expect any meaningful property acquisitions in 2011, given currently high property valuations. In the absence of property acquisitions, Boardwalk will likely use available liquidity to fund modest debt repayment and its unit repurchase program. A negative rating action would be contingent on the following: (1) unexpected weakness in the multi-family residential sector; and (2) leverage rising above 65% (on a debt-to-gross book value assets basis) combined with a sustained decline in EBITDA interest coverage to below 2.20 times. On the other hand, a rating improvement would result from a material reduction in secured debt levels, significant improvement in earnings demonstrated by a sustained increase in EBITDA interest coverage above 2.60 times and/or a meaningful improvement in geographic diversification.

Note:
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.