Allied Properties’ debt downgraded to ‘junk’ by Moody’s

Moody’s Ratings downgraded office owner and operator Allied Properties REIT’s senior unsecured debt rating to junk status on Tuesday, dropping it one level to Ba1 with a continuing negative outlook due to what the agency considers ongoing high debt levels.

Moody’s had previously rated Allied’s debt as Baa3, its lowest “investment-grade” rating.

“Although the REIT’s properties have largely outperformed the broader markets over last few years, the difficult leasing environment has weakened its portfolio occupancy and reduced rent growth,” Moody’s senior credit officer Ranjini Venkatesan wrote in the note.

Allied (AP-UN-T) is a Toronto-based real estate investment trust which is focused on the office sector and holds approximately $9.3 billion of properties in its portfolio.

The REIT has $10.4 billion in total assets, according to its Q1 2024 financial statements, although that is down slightly from $10.6 billion in its year-end 2023 statements (which valued its property assets at just under $9.4 billion).

While Moody’s referred to Allied’s debt levels and ongoing challenges in the office sector in the rationale for the downgrade, Allied’s total indebtedness ratio has remained at a conservative level compared to some other trusts and investors in real estate – at 35.9 per cent as of its Q1 financials.

That is, however, up from 34.7 per cent at the end of 2023, and with interest rates remaining elevated, when Allied’s existing debt comes due it would likely be renewed at higher rates.

Major property value writedowns in Q4

One factor which has affected the debt ratio is recent asset writedowns. As the office sector has languished, property values have declined leading to a writedown of $495 million on its assets in its year-end 2023 financials.

That was the main factor in a $499-million loss reported in Q4.

In its favour, Allied retains approximately $8.6 billion in unencumbered assets and reported $730 million of liquidity at the end of Q1 ($830 million if its accordion facility is included).

It holds 198 rental properties in its portfolio in key urban centres Montreal, Ottawa, Toronto, Kitchener, Ont., Calgary, Edmonton and Vancouver. Its development pipeline is valued at about $1 billion.

Allied has also remained active in the transaction market, including the acquisitions of majority stakes in two major office properties – 400 West Georgia in Vancouver and the mixed-used 125 Duncan in Toronto – which were announced in March.

In both of those transactions, Allied is converting debt positions with its partner Westbank into additional equity in the facilities.

The deal values the two assets at just over $920 million.

Transactions add “great assets” to Allied portfolio

While the transactions will increase Allied’s debt levels, board chair Michael Emory called the two properties “great assets” in a recent interview with BNN Bloomberg. The REIT also noted in the transaction announcement it is moving to sell some non-core assets which will alleviate some of that additional debt.

In terms of occupancy, Allied’s leased area in its portfolio declined from 88.8 per cent at the end of Q1 2023 and 87.3 per cent at year-end, to 87 per cent at the end of the most recent quarter.

However, president and CEO Cecilia Williams had expressed optimism about leasing momentum in Allied’s year-end conference call with analysts after over 610,000 square feet of leasing contracts during Q4. 

“We believe we’re at an inflection point and that leasing momentum, which accelerated in the last quarter of 2023, will continue through the coming year,” Williams said.

She added she was confident occupancy will return to the 94 to 95 per cent range – though she did not offer a timeline for that to occur. Emory echoed that sentiment during the more recent BNN Bloomberg interview, referring to “possibly” a one to two-year time frame.

In Q1 2024, Allied leased 526,682 of new and renewal space, conducted 300 tours and achieved a spread of 4.7 per cent on lease renewals.