DBRS Confirms Allied Properties’ Senior Unsecured Debentures at BBB (low) with a Stable Trend

DBRS Limited (DBRS) confirmed the rating of the Senior Unsecured Debentures issued by Allied Properties Real Estate Investment Trust (Allied or the Trust) at BBB (low) with a Stable trend. The rating continues to be supported by Allied’s leading position in the Canadian Class I office property segment, quality portfolio of assets located in proximity to central business districts of large, dynamic cities; a diverse tenant base; and the growth opportunity presented by its robust development pipeline. The rating is constrained by the funding needs of the Trust’s capital intensive growth plans, development execution risks, relatively small portfolio, and geographic and asset type concentration.

The Stable trend reflects (1) Allied’s growing presence in the urban data centres segment in Toronto, beneficial to asset type diversification and further solidifying Allied’s market position, in DBRS’s view, and (2) improving lease maturity profile by way of lengthening lease terms. The aforementioned incremental positive considerations are balanced primarily by limited visibility regarding the ongoing funding of Allied’s growing development pipeline. DBRS recognizes Allied’s ability to raise equity given favorable valuations of its units; indeed, Allied’s key financial risk metrics have improved materially since year-end (YE) 2017 due to equity offerings and debt reduction (last-12-months basis at September 30, 2018, total debt-to-EBITDA of 7.7 times (x) and EBITDA interest coverage (including capitalized interest) of 2.67x). Nevertheless, DBRS has taken the conservative view that should the Trust’s growing development program be debt financed, then Allied’s key financial risk metrics as measured by total debt-to-EBITDA and EBITDA interest coverage (including capitalized interest) can be expected to reach, respectively, 9.1x and 2.5x by YE2019, and 9.4x and 2.3x by YE2020.

A positive rating action could result if Allied funds its active development pipeline with a significant portion of equity or delivers stronger EBITDA growth than anticipated by DBRS such that total debt-to-EBITDA improves below 7.8x and EBITDA interest coverage (including capitalized interest) improves above 2.70x on a sustained basis, all else equal. Conversely, a negative rating action could result should Allied fail to execute its development pipeline as expected, resulting in deteriorating business risk factors or lower than anticipated EBITDA such that total debt-to-EBITDA deteriorates materially above DBRS’s expectations of 9.4x by YE2020 and EBITDA interest coverage (including capitalized interest) deteriorates below 2.30x on a sustained basis.

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

The principal methodology is Rating Entities in the Real Estate Industry (April 2018), which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.