DBRS Confirms Dundee REIT Senior Unsecured Debentures at BBB (low), Stable Trend

DBRS has today confirmed the rating of Dundee Real Estate Investment Trust (Dundee or the Trust)’s Senior Unsecured Debentures at BBB (low) with a Stable trend. The confirmation acknowledges an improvement in operating income, financial metrics and portfolio quality achieved through recent acquisitions, while also considering the expectation for modestly lower occupancy levels in the near term and slower pace of property acquisitions going forward.

The rating continues to reflect Dundee’s: (1) mid-size portfolio of office properties, well-located in central business districts and suburban markets; (2) well-diversified and high credit quality tenant base; and (3) conservative financial profile, including strong coverage ratios. The rating is limited by Dundee’s: (1) limited diversification by asset type and significant exposure to suburban office properties; (2) concentration in Toronto and Calgary; and (3) high level of secured debt as a proportion of total debt.

For the 12-month period ended June 30, 2013, Dundee displayed solid earnings growth that was in line with DBRS expectations. The growth was primarily the result of earnings contributions from the 2012 acquisitions of Scotia Plaza and the Whiterock portfolio, and other acquisitions totalling approximately $444.1 million in the first half of 2013. Dundee funded these investments primarily with equity and proceeds from property dispositions, resulting in a moderate improvement in financial metrics.

The stable rating outlook reflects DBRS expectation that near-term growth in operating income will continue to be driven primarily by property acquisitions made in 2013. DBRS estimates that EBITDA will increase to approximately $430 million on an annual basis. Organic growth, however, is expected to moderate, as lower occupancy levels due to tenant downsizing at certain properties will partially offset higher average rental rates on leasing activity. As a result, DBRS expects nominal near-term same property net operating income (NOI) growth in the 0% to 1% range.

DBRS believes Dundee’s enhanced portfolio quality and focus on central business district (CBD) office properties in large Canadian cites will further benefit stability of earnings and cash flow over the medium term. The fact that Dundee’s current in-place rental rates are generally below market, should also help mitigate the impact of any softness in office market rents that may arise from new supply in the Trust’s core Toronto and Calgary markets over the next several years.

DBRS expects the pace of Dundee’s property acquisitions to slow in the near term due to a competitive real estate market and the recent rise in the Trust’s cost of capital. Dundee’s indicated range for acquisitions in 2014 is $300 million to $400 million, which is well below levels achieved over the last couple years. That said, the Trust will likely place a greater focus on improving asset quality through intensification projects at existing properties, while churning its portfolio as opportunities arise.

In terms of financial profile, DBRS expects Dundee to maintain conservative financial metrics and good coverage ratios. In fact, DBRS could tolerate a moderate increase in leverage within the current rating category. In DBRS’s view, the achievement of a positive rating action by Dundee would be less dependent on improvement in coverage and leverage metrics and would most likely result from a significant improvement in asset quality and diversification, and/or lowering the proportion of secured debt.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.