DBRS Morningstar Confirms Ratings on Allied Properties REIT Following Announcement of Planned Sale of Urban Data-Center Portfolio

DBRS, Inc. (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debentures rating on Allied Properties Real Estate Investment Trust (Allied or the REIT) at BBB. All trends remain Stable. These rating actions take into consideration Allied’s January 16, 2023, announcement whereby Allied announced its further intentions to explore the sale of its urban data-center portfolio in Downtown Toronto (the Transaction). The urban data-center portfolio consists of three properties: 151 Front Street West, 905 King Street West, and 250 Front Street West. Allied’s IFRS value of this portfolio was $1.29 billion at September 30, 2022. Allied expects to use a significant portion of the sale proceeds to retire debt and the remaining balance to fund its ongoing development and redevelopment projects.

DBRS Morningstar is of the view that the Transaction as currently described will significantly improve the REIT’s financial risk assessment profile, while its business risk assessment will see modest deterioration, such as the REIT’s diversification. DBRS Morningstar expects that pro forma the Transaction, Allied’s leverage as measured by total debt-to-EBITDA will improve such that the REIT will be operating in the 9.0 times (x) range in the near to medium term from 12.0x for the last 12 months ended September 30, 2022 (LTM). DBRS Morningstar expects EBITDA interest coverage will improve and remain over 3.5x in the near to medium term from 2.9x LTM September 30, 2022.

DBRS Morningstar would consider a positive rating action if Allied’s total debt-to-EBITDA were to decline below 8.6x and EBITDA Interest Coverage were to remain strong, on a sustained basis, all else being equal, while prudently managing development execution risk, with limited disruption to its operations. DBRS Morningstar would consider a negative rating action if Allied’s total debt-to-EBITDA were to remain above 9.3x on a sustained basis, all else being equal (assuming the successful completion of the Transaction consistent with DBRS Morningstar’s expectations.

DBRS Morningstar anticipates revisiting the ratings if and when the Transaction is consummated or should Allied decide to change its plan of the sale.

There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis

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/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

The principal methodology applicable to the rating is Rating Entities in the Real Estate Industry (https://www.dbrsmorningstar.com/research/395563; April 20, 2022).

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

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions

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.

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

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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