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, with Stable trends.
The rating confirmations are based on: (1) Allied’s strong leadership in the Class I brick-and-beam office segment and its extension into hybrid office structures (blending historic and modern elements) 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 access to liquidity of more than $296.0 million, primarily by way of its unsecured revolving operating facility; (4) a well-laddered debt maturity profile with limited maturities through 2024; and (5) a predominately unsecured debt capital structure with a secured debt-to-total debt ratio of 9.5%, as calculated by DBRS Morningstar, as at September 30, 2021, and with an unencumbered asset pool valued at $8.7 billion, providing 2.6 times (x) coverage over unsecured debt (including undrawn capacity on unsecured credit facilities).
However, the ratings are constrained by: (1) elevated expected leverage as measured by total debt-to-EBITDA of 10.3x for last twelve months ended September 30, 2021, as calculated by DBRS Morningstar, notwithstanding that in DBRS Morningstar's view, this leverage metric could meaningfully improve through 2023 with potential equity raises, planned dispositions, further development completions and stabilization of completed developments; (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 distinctive office, network-dense data centre, retail, and residential real estate assets in Canada’s key urban markets, particularly Toronto and Montréal.
DBRS Morningstar notes the ongoing contribution of development and acquisition activity to the gradual improvement in the quality of Allied’s urban real estate portfolio and the eventual growth and stability of cash flows; however, DBRS Morningstar has not yet made any adjustments to Allied’s business risk assessment given the ongoing uncertainty associated with the coronavirus pandemic, and the timing of development completions and their subsequent stabilization.
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 being equal, while prudently managing development execution risk, with limited disruption to its operations. DBRS Morningstar’s current expectations are for total debt-to-EBITDA to rise to the mid-10x range in 2022 before improving to below 9.0x in 2023. EBITDA interest coverage is expected to remain above 3.1x during this period. In conjunction with improving leverage, reduction of development and leasing risks associated with The Well (as it moves towards stabilization) and improvement in the asset quality of the portfolio (resulting from ongoing stabilization of developments) could positively contribute to the rating. A negative rating action would be considered if Allied’s operating environment deteriorates beyond DBRS Morningstar’s current expectations resulting in further downward revisions to the Trust’s financial risk assessment and re-evaluation of Allied’s underlying business risk assessment.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/rese arch/373262.
All figures are in Canadian dollars unless otherwise noted.
The principal methodology is Rating Entities in the Real Estate Industry (April 23, 2021; https://www.dbrsmorningstar.com/research/377358), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).
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.
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