DBRS Changes Trend on Allied Properties REIT’s Senior Unsecured Debentures to Positive and Confirms at BBB (low)

DBRS Limited (DBRS) changed the trend on Allied Properties Real Estate Investment Trust’s (Allied or the Trust) Senior Unsecured Debentures to Positive from Stable and confirmed the rating at BBB (low). The Positive trend reflects Allied’s continued prudent funding of its development pipeline, most recently its $230 million equity raise in March 2019, and incremental improvement in portfolio diversification. This includes (1) improving asset type diversification with the continued growth in the Trust’s urban data centres segment (representing 19% annualized net operating income (NOI) at March 31, 2019) and within the office subsector as new builds are added to the rental portfolio by way of development completions (King Portland Centre in Q1 2019), thus complementing Allied’s traditional market-leading position in niche Class I brick and beam office assets; and (2) improving geographic diversification, including several recent property acquisitions in Vancouver. Since September 30, 2018, acquisitions in Vancouver include 1220 Homer, 151 West Hastings, 342 Water and 2233 Columbia, representing approximately 110,000 square feet (sf) of gross leasable area (GLA) for approximately $103 million (excluding yet-to-close 1050 Homer with 42,000 sf).

The rating continues to be supported by a well-located urban office portfolio, demonstrating continued strong same rental property NOI growth (6.4% year over year at March 31, 2019), underpinned by occupancy gains and rental rate growth. Rental rate growth is likely to continue in the near to medium term with continued positive spreads between Allied’s estimated market rents and rents on maturing leases through 2023. The rating is also supported by the Trust’s diverse tenant base and improved lease profile. The rating continues to be constrained by execution risk given Allied’s capital intensive development pipeline (the Trust estimates $830 million from 2019 through 2022) and associated funding alternatives, notwithstanding demonstrated equity financing. Despite improving asset diversification and better representation in Vancouver, Allied’s rating is limited by: (1) concentration in the office subsector (representing 69% of annualized NOI at March 31, 2019), particularly the Class I segment; (2) geographic concentration in Toronto and Montréal with each market representing 41.4% and 37.4% of the Trust’s GLA, respectively, at March 31, 2019; and (3) concentration by property with the top ten properties representing 42.6% of annualized NOI at March 31, 2019.

A rating upgrade is more likely than not within the next 12 months if Allied can demonstrate the following: (1) continue to execute on its development pipeline in terms of preleasing and transfers of stabilized properties to the rental portfolio, thereby reducing lease risk and materially improving asset quality; (2) maintain its improved lease profile as measured by lease maturities and/or counterparty risk; and (3) continue to prudently fund its growth plans with a balance of equity and debt financings. DBRS’s expectation is that improving business risk assessment factors will offset anticipated modest deterioration in financial risk metrics in the near to medium term, with total debt-to-EBITDA peaking in the mid-8 times range, until newly completed development projects are stabilized, after which time the financial risk metrics are expected to improve.

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

The principal methodology is Rating Entities in the Real Estate Industry (April 2019), which can be found on dbrs.com under Methodologies & Criteria.

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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