DBRS: Confirmation of BBB- rating (Negative trend)The negative trend stay but AP.un is still at the Investment grade level. Good news.
DBRS forecasts is for Debt/EBITDA ratio at 9X in 2026.
With the back to office trend and the rates decline, an appreciation to 28$ in 2025 is feasible.
Key Credit Rating Considerations DBRS, Inc.
(Morningstar DBRS) changed the trends on Allied Properties Real Estate Investment Trust’s (Allied or the REIT) credit ratings to Negative from Stable and confirmed Allied’s Issuer Rating and Senior Unsecured Debentures credit rating at BBB.
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 Montral). 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.
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) highquality 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.