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

DBRS has today confirmed the stability rating of Canadian Real Estate Investment Trust (CREIT or the Trust) at STA-3 (high). The rating confirmation takes into consideration the conservative financial profile of the Trust, relatively stable operating income, and the concentration of industrial and office lease rollovers during the 2011 to 2013 period.

Operating income for CREIT’s portfolio held relatively steady in 2010 despite lower occupancy levels across each asset segment, particularly industrial. Higher average rental rates on office lease expires helped offset some of the impact from lower occupancy levels and has provided recent support to CREIT’s same portfolio net operating income. The Trust’s portfolio occupancy levels at 94.3% (as at Q4 2010), however, still remain solid and within the Trust’s historical range. Property acquisitions during the year were minimal and is mainly comprised of land purchases held for future development, some of which were acquired through CREIT’s mezzanine financing program. From a financial profile stand point, CREIT has primarily used free cash flow to pay down debt and fund modest property acquisitions over the past couple of years. As a result, debt levels have decreased meaningfully to 50.4% on a gross debt-to-book value assets ratio and EBITDA interest coverage improved to 3.19 times for the year ended December 31, 2010. Overall, DBRS believes that these key credit metrics are at strong levels for the current rating category.

CREIT’s stability rating is underpinned by the following strengths: (1) Well diversified portfolio by asset type, geography and tenant; (2) Stable retail property portfolio; and (3) Conservative balance sheet and strong coverage metrics. The rating category also reflects the following challenges: (1) near-term exposure to office and industrial re-leasing risk; (2) small office and industrial portfolios; and (3) external growth opportunities are limited.

Going forward, DBRS expects that operating income could modestly decline as the Trust slowly contracts its mezzanine financing program and non-income producing assets are brought on-balance sheet. In addition, same portfolio NOI growth will likely remain under modest pressure as the Trust has exposure to office and industrial re-leasing risk over the next few years. New supply remains a concern in the Trust’s core office markets and a strong Canadian dollar will likely continue to curb demand for industrial space, especially in the Greater Toronto Area (GTA) market. DBRS, however, believes these concerns are manageable particularly as the economic environment continues to improve. In addition, portfolio diversification and reasonable retail lease maturities should provide underlying stability to cash flow. While DBRS does not anticipate meaningful property acquisitions in 2011 mainly due to the fact that a limited amount of quality assets are being brought to market, CREIT’s conservative balance sheet affords it the ability to make debt funded acquisitions and keep leverage below the 55% level which is reflected in the current rating. Financial flexibility is also supported by positive free cash flow and undrawn credit facilities.

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.