DBRS Confirms Primaris Retail REIT at BB (high), with a Stable Trend

DBRS has today confirmed the BB (high) Issuer Rating of Primaris Retail Real Estate Investment Trust (Primaris or the Trust), as the Trust continues to maintain a reasonable credit profile with support from its conservative balance sheet, good operating metrics and significant liquidity position to meet its modest near-term capital requirements.

The rating confirmation reflects the fact that Primaris continues to operate with a significant liquidity position consisting of $58.7 million of cash on hand and an unused $120 million revolving credit facility (matures on July 31, 2010) as at Q2 2009. In addition, DBRS believes Primaris has appropriately managed its balance sheet, with conservative debt levels. For the last 12 months (LTM) ended Q2 2009, the Trust had a debt-to-gross book value assets ratio of 49.5% (54.5% including convertible debentures) and EBITDA interest coverage of 2.41 times, which compares favourably with other DBRS-rated REITs. While the Trust’s financial flexibility is reduced by its relatively high payout ratio of 116.4% (DBRS adjusted for maintenance capital and leasing costs) for the LTM Q2 2009, DBRS believes this shortfall is manageable in the near term and has good support from the Trust’s conservative balance sheet and strong liquidity position. The Trust also has little or no exposure to refinancing risk over the next couple of years, with only $3.7 million of principal repayments (the balance is in the form of mortgage amortization) for the remainder of 2009 and no principal repayments in 2010.

The rating confirmation also takes into consideration that the Trust has a mid-sized portfolio consisting of primarily enclosed shopping malls, which are generally well-maintained and diversified in secondary and primary markets across Canada.

Despite the challenging broader economic conditions, Primaris’ portfolio continues to perform reasonably well and achieve higher rental rates on lease renewals with a 3.3% increase in average rental rates over expiring rates (lease renewals represented 79% of the 332,729 square feet (sq. ft.) of leased space during Q2 2009). The Trust’s properties also continue to achieve high occupancy levels (96.4% as at Q2 2009), which is in line with the Trust’s retail REIT peers and its historical range of 96% to 98%.

Nevertheless, DBRS expects broader economic and retailing conditions to remain challenging for 2009 and into 2010, which could put pressure on the Trust’s cash flow levels and the performance of its tenants. DBRS notes that Primaris’ same-tenant sales have declined for two consecutive quarters in 2009, which could have a negative impact on future rental rates. While tenant disruptions have been very manageable to date, the Trust’s focus on enclosed shopping malls exposes it to tenants who concentrate on discretionary goods/services and to the performance of large anchor tenants, including The Bay and Zellers (collectively, The Hudson’s Bay Company (HBC)) and Sears Canada. As at Q2 2009, HBC and Sears Canada represented approximately 28.4% of total leasable square feet. Given this significant concentration, DBRS notes that loss of an anchor tenant could have a negative impact on overall performance of the anchored property, including existing ancillary tenants. DBRS does note, however, that Primaris has been able to accommodate changes in anchor tenants from store closures in recent years, which has generally produced higher overall net rental income.

Overall, DBRS believes that this risk is manageable in the near term and expects Primaris’ credit profile to remain stable, with support from its balance sheet flexibility and significant liquidity position. In addition, Primaris has modest lease maturities for the remainder of 2009, which should provide reasonable support to cash flow levels and limit exposure to the difficult leasing conditions expected throughout 2009.

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.