DBRS Confirms Canadian Real Estate Investment Trust at STA-3 (middle)

DBRS has today confirmed the stability rating of Canadian Real Estate Investment Trust (CREIT or the Trust) at STA-3 (middle). The rating confirmation incorporates the fact that CREIT continues to maintain a solid stability profile with a low payout ratio (69.5% DBRS-adjusted) that has benefited from growth in per unit cash available for distribution over the past several years. In addition, the Trust has good financial flexibility to meet upcoming capital requirements, with support from a reasonable balance sheet with pro forma debt levels of approximately 55% (reflecting the Trust’s $100 million equity issuance on March 16, 2009) and a positive free cash flow position. CREIT has manageable fixed-term debt maturities over the next three years and relatively low exposure to refinancing risk in 2009 when approximately 9.3% of debt is set to mature.

Subsequent to Q4 2008 and pro forma the equity issuance, CREIT had the full amount available on its credit facility and cash on hand of approximately $50 million. The rating confirmation also takes into consideration the fact that the Trust has made good progress in lowering its business risk profile by disposing of its partial interests (about 50%) in existing office properties and reinvesting the proceeds in the more stable retail and industrial segments over the past few years.

During 2008, CREIT acquired approximately 1.6 million square feet (sq. ft.) ($244.8 million), mainly consisting of an industrial portfolio located in Calgary, Alberta, and Brampton, Ontario, and a portfolio of Canadian Tire retail stores entirely leased to Canadian Tire Corporation, Limited (Canadian Tire; rated A (low) by DBRS) under a 15-year triple net lease term. While DBRS views these investments as positive, as they improve both the quality and stability of CREIT’s cash flow, the Trust’s portfolio does have exposure to weakening office fundamentals and slowing demand for commercial real estate space. DBRS notes that CREIT’s core office markets have a significant amount of new office space scheduled for completion between 2009 and 2011, with more than three million sq. ft. in Toronto and five million sq. ft. in Calgary currently under construction. Given the amount of new supply and the current economic downturn, DBRS expects office fundamentals to weaken throughout 2009 and into 2010, which could put pressure on the Trust’s office portfolio and also result in higher tenant inducements and leasing costs. The Trust also has exposure to re-leasing risk, with 42% and 37.8% of its office and industrial space, respectively, set to mature by the end of 2011, which could put pressure on its office and industrial operating metrics.

Overall, DBRS believes that these near-term operating risks are manageable and expects CREIT’s stability profile to remain stable in 2009 with support from the following strengths:

(1) CREIT’s portfolio is well-diversified by geography and by asset type, with retail properties accounting for 50% of net operating income (NOI), office (25% of NOI), and industrial (25% of NOI). CREIT also has a diversified tenant profile, with no one tenant accounting for more than 4.7% of gross revenue. In addition, CREIT’s top ten tenants are of solid credit quality or are nationally recognized tenants under long-term leases.

(2) CREIT benefits from its stable retail property portfolio, which mainly comprises unenclosed strip malls anchored by a grocery tenant or a large, discount retailer tenant, such as Wal-Mart, under long-term leases. These malls tend to perform well throughout all economic cycles as many of the tenants provide everyday “necessity” goods and services. The strength of CREIT’s retail portfolio is illustrated in its consistently high occupancy levels, which have exceeded 97% since 1994. The retail portfolio is expected to continue to contribute to cash flow stability, with modest lease maturities over the next two years (3.0% in 2009 and 6.5% in 2010), which could provide underlying support to portfolio operating metrics.

(3) The Trust continues to maintain solid credit metrics to support the current rating. CREIT has a pro forma debt-to-gross book value assets ratio of about 55%, in line with its target in the mid-50% range. The Trust has maintained stable EBITDA interest coverage of between 2.9 times and 3.0 times, which compares favourably with other Canadian REITs. Overall, DBRS believes CREIT has appropriately managed its balance sheet with a prudent level of financial strength, which should position the Trust for growth opportunities when economic conditions stabilize.

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

The applicable methodology is Rating Real Estate, which can be found on our website under Methodologies.

This is a Corporate rating.