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

DBRS Limited (DBRS) 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. The rating takes into consideration Allied’s leading position in the Class I office property segment in Canada (estimated target market share of 24%), diverse tenant base, quality portfolio and robust development pipeline with currently estimated 1.9 million sq. ft. slated for completion through 2021. The rating is limited by Allied’s overall size relative to its investment-grade-rated real estate peers (LTM EBITDA of $234.7 million), portfolio concentration (office accounts for 85.8% of gross leasable area (GLA), with 76% of GLA located in Toronto and Montréal) and weakened debt metrics (notably, total debt-to-EBITDA of 8.5 times (x)).

The Stable rating outlook reflects DBRS’s expectation that in the near to medium term Allied will continue to deliver low-single-digit growth in EBITDA with moderating overall capital expenditures (notwithstanding the portion comprising development spending accelerating to $150 to $175 million per year), while taking into account low-single-digit growth in distributions per unit and further geographic concentration as Allied progresses its development pipeline.

During the first nine months of 2017 (YTD), Allied’s EBITDA grew $13.9 million or 8.6% over the same year-ago period, largely driven by rent growth and occupancy gains (incremental 1.8%) particularly in Allied’s core Toronto and Montréal markets. Occupancy at 250 Front, Allied’s leasehold cloud-hosting facility, increased to 60% at September 30, 2017, from 54% at YE 2016. Total debt increased by $79.2 million or 4.0% YTD as Allied spent $212 million acquiring and upgrading properties. The resulting increase in total debt-to-EBITDA to 8.5x is nearing the high end of the range and limits financial flexibility within the current rating category, while Allied continues to generate positive cash available for distribution ($70.3 million YTD).

While unlikely in the near to medium term, DBRS would consider a positive rating action should Allied significantly increase the size and scale of its portfolio as measured by EBITDA while maintaining its existing portfolio strategy and incurring only modest incremental debt. Alternatively, DBRS would consider a negative action should the EBITDA-to-interest expense ratio fall below 2.30x or if total debt-to-EBITDA increases above 8.6x 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 2017), 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.

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