DBRS Morningstar Upgrades Rating on Allied Properties Real Estate Investment Trust to BBB, Maintains Positive Trend

DBRS Limited (DBRS Morningstar) upgraded its rating on Allied Properties Real Estate Investment Trust’s (Allied or the Trust) Senior Unsecured Debentures to BBB from BBB (low) and maintained the Positive trend. The rating upgrade largely reflects (1) Allied’s transition to a predominately unsecured debt capital structure with a secured debt-to-total debt ratio comfortably below 40% on a sustained basis as the Trust aims to fund maturing mortgages and, in some cases, prepay mortgages with unsecured debt; (2) the Trust’s growing portfolio of quality unencumbered assets valued at approximately $5.2 billion, which provides coverage of approximately 3.0 times (x) on unsecured debt, including undrawn capacity on unsecured credit facilities; and (3) DBRS Morningstar’s increased visibility on Allied’s funding of growth capital expenditures (capex).

DBRS Morningstar estimates that Allied’s current secured debt-to-total debt ratio is approximately 38% (including guaranteed third-party construction debt) after the Trust issued the 3.113% Series E Senior Unsecured Debentures and prepaid $140 million in mortgages on October 8, 2019. DBRS Morningstar anticipates that Allied’s secured debt-to-total debt ratio will decline in the near to medium term, which is consistent with management’s stated intention to repay or prepay all outstanding mortgages in due course. DBRS Morningstar believes that a largely unsecured debt stack, a large pool of quality unencumbered assets that provide financial flexibility and liquidity (if needed), and satisfactory forward-looking key financial risk metrics warrant a rating uplift.

On May 17, 2019, DBRS Morningstar changed the trend on Allied’s Senior Unsecured Debentures rating to Positive from Stable, but did not anticipate the Trust’s transition to an unsecured debt capital structure by December 2019. The rating upgrade does not affect DBRS Morningstar’s view that the trend should remain Positive. The Positive trend considers Allied’s $345 million equity offering on December 4, 2019, the proceeds of which are to fund (1) acquisitions, including three recent infill acquisitions in Montréal, Toronto and Calgary totalling $53 million, and (2) Allied’s ongoing development program, for which DBRS Morningstar anticipates $200 million to $300 million in capex per year through 2021. The Trust’s latest equity offering further demonstrates its commitment to prudently managing leverage in light of its sizable development pipeline with a projected cost to complete of $600 million at September 30, 2019. Following Allied’s recent equity offering, DBRS Morningstar updated its expectations for total debt-to-EBITDA and EBITDA interest coverage to approximately 8.0x and 3.0x through 2021, respectively, which place the rating firmly in the BBB range on a stand-alone basis (excluding any positive rating uplift from the Trust’s recent shift to an unsecured weighted-debt capital stack). DBRS Morningstar remains mindful of elevated development execution risks, including leasing, cost overruns, exposure to supply/demand dynamics, counterparty, availability of funding, and cost.

DBRS Morningstar will consider a further rating upgrade within the next 12 months if Allied can continue to prudently fund its acquisition and development program, such that DBRS Morningstar can comfortably expect key financial risk metrics to remain satisfactory for the rating on a sustained basis; and commit to upgrading the Trust’s portfolio asset quality through its acquisition and development program and stabilizing completed developments, thereby reducing leasing and development risks. DBRS Morningstar is not contemplating a negative rating action at this time, given Allied’s improved forward-looking key financial risk metrics and low proportion of secured debt in the debt capital structure, among other positive factors.

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

The principal methodologies are Rating Entities in the Real Estate Industry and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships, 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 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.

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