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

DBRS Limited (DBRS) has today confirmed the rating of Allied Properties Real Estate Investment Trust’s (Allied or the Trust) Senior Unsecured Debentures at BBB (low) with a Stable trend. DBRS’s rating takes into account 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 its investment-grade-rated real estate peers, geographic concentration and a high degree of concentration by asset type (office accounts for 84.6% of net operating income (NOI), 66.6% excluding equipment (telecom and IT) space).

The stable rating outlook reflects DBRS’s expectation that Allied will continue to deliver steady growth in EBITDA in 2016, based primarily on full-year income contributions from recent property acquisitions, ongoing redevelopment and property upgrades. DBRS also expects mid-single-digit same-property NOI growth in 2016 because of higher occupancy from the lease up of completed development projects, particularly in the Montréal portfolio, and modestly higher rental rates on leasing activity during the year. As a result, DBRS estimates EBITDA to reach $235 million on an annual basis in 2016. In the near term, DBRS expects the pace of acquisition activity to slow, mainly because of the current highly competitive property markets and a limited amount of quality Class I office space with attractive valuations being brought to market. However, Allied has built a substantial development pipeline (including property upgrades, redevelopments and large-scale intensification projects) that DBRS believes will become the lead driver of earnings growth over the next several years. The development pipeline includes eight rental properties in downtown Toronto comprising an estimated 3.6 million sf (owned interest). Four of the properties are wholly owned by Allied and the remaining four are co-owned with strategic and experienced partners.

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 continue to build out its sizeable unencumbered pool of properties and maintain 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. 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.

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

The applicable methodology is Rating Entities in the Real Estate Industry, which can be found on our website under Methodologies.