DBRS Rates Allied Properties REIT at BBB (low), Stable Trend

DBRS Limited (DBRS) has today assigned an Issuer Rating of BBB (low) with a Stable trend to Allied Properties Real Estate Investment Trust (Allied or the Trust). DBRS notes that the Issuer Rating reflects the credit quality of prospective debt that ranks below Allied’s property-specific secured debt (i.e., mortgages and revolving credit facilities) held at the Trust level.

Allied owns and manages a portfolio of Class I office properties, which are primarily located in close proximity to the central business districts of several major Canadian cities. As at Q3 2014, the portfolio consisted of 139 properties and approximately 10.2 million square feet (sf). Since its initial public offering in 2003, Allied has established a leading position in the Class I property market in Canada, mainly in the sub-markets of downtown Toronto, Montréal and Calgary. As a Class I market consolidator, Allied has achieved significant portfolio and earnings growth while steadily improving its property and geographic diversification. Allied has also consistently displayed a record of prudent financial management.

DBRS’s rating reflects Allied’s leading position in the Class I property segment, solid financial profile for the current rating category, a diverse tenant base and well-managed and maintained properties. The rating is also limited by Allied’s overall size relative to investment-grade rated real estate peers, geographic concentration, a high degree of concentration by asset type (office accounts for 84% of net operating income (NOI), 70% excluding equipment (telecom and IT space)) and a high proportion of secured debt.

The stable rating outlook reflects DBRS’s expectation that Allied will continue to deliver steady growth in EBITDA in 2015 based primarily on full-year income contributions, recent property acquisitions, such as 555 Richmond Street West, and ongoing redevelopment and property upgrades. As a result, DBRS estimates EBITDA to reach $225 million on an annual basis in Q2 2015. In 2015, Allied is expected to complete $200 million of acquisitions with a cap rate of 6% to 6.5%. Property investments will likely continue to focus on high barrier to entry major growing urban markets in Canada, including Toronto, Montréal and Calgary. In addition to the expected completion of Allied’s QRC West redevelopment by Q3/Q4 2015, property upgrades, redevelopments and large scale intensification projects will become the lead growth drivers over the next three years. The Trust currently has an estimated 3.9 million sf of future projects in the approval stage.

The rating outlook also assumes that Allied will continue to exercise prudence with respect to the financing of its future investments. DBRS expects the Trust to maintain a conservative financial profile and strong coverage ratios in relation to its investment-grade peers. That said, DBRS could tolerate a moderate increase in leverage within the parameters of the current rating category. In DBRS’s view, the achievement of a positive rating action by Allied would be less dependent on improvement in financial metrics and would be based on a significant increase in the size and scale of the Trust’s portfolio while maintaining or improving its asset quality and diversification and/or lowering the proportion of secured debt.

On the other hand, weaker-than-expected operating and earnings performance and/or higher financial leverage that leads to EBITDA interest coverage falling below 2.30 times on a sustained basis could result in a negative rating action.

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 Entities in the Real Estate Industry (October 2013), which can be found on our website under Methodologies.