DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debentures rating of Allied Properties Real Estate Investment Trust (Allied or the Trust) at BBB. DBRS Morningstar also changed the trends on the ratings to Stable from Positive.
The change to Stable trends reflects DBRS Morningstar’s assessment of deterioration in Allied’s financial risk metrics relative to expectations since its rating action on December 4, 2019. DBRS Morningstar’s current expectation for total debt-to-EBITDA is for further deterioration on an interim basis to more than 9.5 times (x) by YE2021 from 9.0x last 12 months ended September 30, 2020, before returning to approximately 9.0x by YE2022. DBRS Morningstar expects EBITDA interest coverage to remain at approximately 3.0x through 2022. This revised outlook contrasts with DBRS Morningstar’s prior expectations for Allied’s total debt-to-EBITDA and EBITDA interest coverage of approximately 8.0x and 3.0x through 2021, respectively. DBRS Morningstar’s outlook for key financial risk metrics does not contemplate funding future growth capital expenditures with equity, notwithstanding Allied’s proven ability to access equity capital markets.
DBRS Morningstar’s analysis concluded that the deterioration has largely been driven by (1) DBRS Morningstar’s tempered expectations for same asset net operating income growth resulting from the impact of the Coronavirus Disease (COVID-19) pandemic on Allied’s operations; (2) revised expectations for completion and stabilization of the Adelaide & Duncan and Breithaupt Phase III development projects into 2022, with the associated takeout of construction loans and release of Allied’s joint and several guarantees; and (3) more than $560 million in primarily debt-financed acquisitions year to date (notwithstanding Allied’s September 2020 equity raise of $153 million, gross) of high-quality properties including The Landing in Vancouver and the World Trade Centre in Montréal. DBRS Morningstar recognizes the continued improvement in the quality of Allied’s urban office portfolio and resulting stability of cash flows; however, DBRS Morningstar has not adjusted upward Allied’s business risk assessment at this time in light of the elevated uncertainty with respect to the coronavirus pandemic.
The rating confirmations are based on (1) Allied’s strong leadership in the niche Class I brick and beam office segment with defensible central business district properties in high-barrier-to-entry markets that are expected to continue to underpin cash flow stability; (2) the Trust’s highly diversified, quality tenant roster with a well-laddered lease maturity profile; (3) Allied’s ample access to liquidity of more than $619 million by way of its unsecured revolving operating facility; (4) a well-laddered debt maturity profile with limited maturities through 2021; and (5) a predominately unsecured debt capital structure with a secured debt-to-total debt ratio of 30.1% at September 30, 2020, and with an unencumbered asset pool valued at $6.4 billion providing 2.7x coverage over unsecured debt (including undrawn capacity on unsecured credit facilities). The ratings are constrained by (1) the aforementioned elevated leverage as measured by total debt-to-EBITDA; (2) capital-intensive growth plans with execution risks, including leasing risk, risk of cost overruns, risk of delays, and availability of funding which may lead to some volatility in financial risk metrics; and (3) concentration risks as Allied is primarily an owner/operator of Class I brick and beam office assets in Canada’s key urban markets.
DBRS Morningstar would consider a positive rating action if Allied’s total debt-to-EBITDA declines below 8.6x, on a sustained basis, all else equal, while prudently managing development execution risks and successfully managing through the coronavirus pandemic and beyond with limited disruption to its operations. Conversely, DBRS Morningstar would consider a negative rating action should Allied’s operating environment deteriorate beyond DBRS Morningstar’s current expectations resulting in further downward revisions to the Trust’s financial risk assessment and reevaluation of Allied’s underlying business risk assessment.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Entities in the Real Estate Industry (June 4, 2020) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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 email@example.com.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at firstname.lastname@example.org.
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