DBRS Upgrades Canadian Real Estate Investment Trust to BBB with a Stable Trend

DBRS has today upgraded the rating of Canadian Real Estate Investment Trust (CREIT or the Trust) to BBB from BBB (low), with a Stable trend. The rating upgrade reflects the following: (1) Since DBRS’s initial rating in December 2004, CREIT has made good progress in improving its business risk profile and cash flow stability by enhancing geographic diversification (i.e., acquiring properties and completing development projects outside of Ontario markets) and disposing of a partial interest (about 50%) in several of its office properties. The Trust has used proceeds from these dispositions to reinvest in the more stable retail and industrial segments. In addition, DBRS believes that CREIT’s portfolio and cash flow levels have grown to a size that is now within the parameters of the BBB rating category.

(2) CREIT has also achieved portfolio growth while maintaining a conservative financial policy and improving its credit metrics. For the 12-month period ended March 31, 2010, CREIT had a solid financial profile, with debt levels at 51.4% on a gross-to-book value of assets basis and EBITDA interest coverage of 3.12 times, which ranks among the highest of its REIT peers. CREIT also continues to demonstrate ample financial flexibility to fund near-term capital commitments with support from its positive free cash flow position (approximately $43.6 million) and prudent payout ratio, which has supported two distribution increases over the last year. In addition, CREIT has a relatively low exposure to refinancing risk with manageable fixed-term debt maturities over the next three years when no more than 12.8% of debt per year is set to mature.

Going forward, the rating improvement also takes into consideration that the Trust maintains a conservative financial policy underpinned by a positive free cash flow position, EBITDA interest coverage of above 2.50 times and debt levels in the mid-50% range based on gross book value of assets. Overall, DBRS believes that CREIT has appropriately managed its balance sheet with a prudent level of financial leverage and a low payout ratio, which should position the Trust for growth opportunities over the medium term.
(3) The rating improvement also takes into consideration the fact that despite challenging economic conditions, CREIT’s portfolio metrics continue to hold up relatively well, with a portfolio occupancy level of 95% as at Q1 2010. CREIT continues to benefit from a well-diversified portfolio, with retail properties accounting for 53% of net operating income (NOI), office (24% of NOI), and industrial (23% 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 nationally recognized tenants under long-term leases. Going forward, the Trust has significant exposure to re-leasing, with 34.3% of its office space set to mature by the end of 2012. This, combined with currently challenging economic conditions and new office supply in the Trust’s Calgary and Toronto markets, could put modest pressure on cash flow levels and result in higher leasing costs over the next few years. However, DBRS believes that these near-term concerns are manageable given CREIT’s solid financial profile and the diversification of its portfolio with underlying cash flow stability provided by modest retail lease maturities in 2010.

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.