Morningstar DBRS Changes Trends on Allied Properties Real Estate Investment Trust to Negative From Stable and Confirms Credit Ratings at BBB

DBRS, Inc. (Morningstar DBRS) changed the trends on Allied Properties Real Estate Investment Trust's (Allied) credit ratings to Negative from Stable and confirmed Allied's Issuer Rating and Senior Unsecured Debentures credit rating at BBB.

KEY CREDIT RATING CONSIDERATIONS
The Negative trends reflect Allied's elevated leverage as measured by total debt-to-EBITDA, which Morningstar DBRS does not expect to return to levels commensurate with the current credit ratings in the near to medium term, barring significant deleveraging progress across a number of fronts in the face of secular headwinds facing the office sector. As of the last 12 months (LTM) ended June 30, 2024, Allied's total debt-to-EBITDA was 12.7 times (x) because of recent transactions, namely the increased ownership interest at 19 Duncan and 400 West Georgia.

The credit rating confirmations consider Allied's portfolio of primarily new-build and renovated Class I brick-and-beam and hybrid office properties in close proximity to central business districts (mostly in Toronto and Montréal). Allied has recently demonstrated a possible inflection point in leasing its portfolio as average in-place net rent per square foot was $25.08 at June 30, 2024, an increase of 6.7% year over year. Rent growth on renewals was 9.7% and occupancy was 87.1% at June 30, 2024.

CREDIT RATING DRIVERS
Morningstar DBRS would consider credit rating downgrades should Allied fail to meet expectations as outlined below, or should Allied's secured debt-to-total debt ratio increase above 40% (17.1% as of June 30, 2024). Morningstar DBRS would consider changing the trends to Stable should Allied meet or exceed expectations as outlined below.

FINANCIAL OUTLOOK
Morningstar DBRS expects Allied's leverage, as measured by total debt-to-EBITDA, to improve in the near term to the low 11x range by YE2025 and further improve to the high 9x range by YE2026. Morningstar DBRS expects EBITDA interest coverage to remain near current levels (2.39x at LTM June 30, 2024). Supporting this outlook are Morningstar DBRS' following expectations: (1) Allied will reduce outstanding indebtedness by successfully executing its planned dispositions of non-core, low-yielding assets and reducing its balance of outstanding loan receivables and guaranteed debt related to development joint ventures (included in Morningstar DBRS-adjusted debt balances); and (2) Allied will earn additional income from the completion and stabilization of developments and recent acquisitions, and a demonstrable trend of recovery in occupancy.

CREDIT RATING RATIONALE
Allied's credit ratings are supported by (1) strong asset quality with niche property segments, (2) high-quality real estate portfolio underpinned by defensible properties, (3) superior diversification by tenants with well-laddered lease maturities, and (4) low secured debt-to-total debt with a well-laddered debt maturity schedule.

The credit ratings remain constrained by (1) Allied's high leverage measured by total debt-to-EBITDA as a result of recent transactions; (2) the lag in office leasing activity, (3) capital-intensive growth plans and execution risks, and (4) concentration risks in terms of segment, geography, and property type.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Allied, the BRA factors were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of Allied, the FRA factors were considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of Allied, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Entities in the Real Estate Industry (April 15, 2024), https://dbrs.morningstar.com/research/431170

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186 which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following criteria has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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