DBRS Assigns Rating of BBB (low) to Dundee Real Estate Investment Trust with a Stable Trend

DBRS has today assigned a rating of BBB (low) with a Stable trend to Dundee Real Estate Investment Trust’s (Dundee or the Trust) Senior Unsecured Debentures. The rating reflects the following strengths: (1) a mid-size portfolio of good-quality office properties, well located within established central business districts and suburban markets that include several prominent properties, (2) a well-diversified tenant base with a large number of high-credit-quality tenants and (3) a conservative financial profile with good coverage ratios. The rating also considers the following challenges: (1) limited asset type diversification and meaningful exposure to suburban office properties, (2) considerable concentration in the Trust’s largest markets of Toronto and Calgary (accounting for 65% of net operating income) and (3) successful integration of recent acquisitions. DBRS believes that Dundee is well placed within the current rating category and that the Trust’s credit risk profile could benefit from continued improvement in asset quality and/or an increase in portfolio size and scale while maintaining a financial profile that is commensurate with investment grade.

Over the past couple of years, Dundee has achieved significant earnings growth and enhanced portfolio quality driven by property acquisitions, dispositions, and mergers and acquisitions activity. In addition, Dundee’s earnings profile has benefited from robust office conditions with notable strength in the Toronto and Calgary markets over the past few years. Dundee has consistently maintained solid portfolio occupancy in the mid-90% range, which is reflective of its good property locations and the stability of its diverse tenant base. Over the past few years, Dundee has gradually improved its financial profile, despite the fact that it has used a slightly greater proportion of debt to fund its portfolio growth. During this period, the Trust has maintained good coverage ratios as a result of significant cash flow growth and lower borrowing costs.

The Stable outlook takes into consideration DBRS’s expectation that Dundee’s earnings profile will continue to benefit from robust office conditions in the Trust’s core markets, positive re-leasing activity (in place rental rates are currently below market) and incremental income from recent property acquisitions. In addition, those recent property acquisitions, such as Scotia Plaza, should enhance cash flow stability with the improvement in asset quality, tenant profile and property diversification.

On October 4, 2012, Dundee completed the sale of its industrial portfolio to a newly created public entity, Dundee Industrial REIT, for $575.9 million. Although this has transformed the Trust into a pure play office REIT and reduced diversification by asset segment, DBRS expects the Trust will continue to reinvest the proceeds gradually into higher-quality office properties.

While DBRS believes the reinvestment of proceeds from the sale of the Industrial portfolio may take some time, given that there is a limited amount of quality real estate being brought to market, the transaction provides the Trust with the opportunity to reduce debt in the meantime. As of September 30, 2012, DBRS believes Dundee had more than sufficient liquidity and good financial flexibility with some additional capacity for debt within the parameters of the current rating category. Going forward, DBRS expects the Trust’s coverage ratios to remain close to or above 2.40 times, a level DBRS considers appropriate for the BBB (low) rating category.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Real Estate Entities (April 2011), which can be found on our website under Methodologies.