DBRS Confirms CREIT at BBB, Stable Trend

DBRS has today confirmed the rating of Canadian Real Estate Investment Trust (CREIT or the Trust) at BBB with a Stable trend. CREIT’s BBB rating is underpinned by the following credit 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) above-average office and industrial lease expiries; (2) small office and industrial portfolios; and (3) a limited amount of quality assets being brought to market that could have an impact on portfolio growth.

Operating income for CREIT’s portfolio increased modestly in 2011, mainly as a result of the acquisition of a 100% interest in two unenclosed shopping centres located in Mississauga, Ontario, and a portfolio of 19 industrial properties just west of Toronto Pearson International Airport in Mississauga. These properties are well located and have occupancy levels above 99%. The Trust also transferred approximately 173,461 square feet of development space to income-producing property status during the year. The Trust’s portfolio continues to achieve strong occupancy levels (96.1% as at Q4 2011). Occupancy improvement in Q4 2011 was mainly due to a temporary lease of vacant industrial space. CREIT’s same-portfolio net operating income (NOI) growth was modest at 1% and benefited from higher rental rates on leasing activity in the retail segment of the portfolio, which more than offset flat-to-modest declines in same-portfolio NOI growth for the remainder of the portfolio.

From a financial profile standpoint, CREIT has primarily used free cash flow and debt proceeds to fund property acquisitions in 2011. As a result, debt levels have increased to 43.2% on a gross debt-to-book value assets ratio (on a reset cost value basis) and EBITDA interest coverage declined to 3.12 times for the year ended December 31, 2011. Overall, DBRS believes that these key credit metrics are at strong levels for the current rating category.

The stable rating outlook takes into consideration DBRS’s expectation that CREIT will continue to experience growth in net rental income and EBITDA in 2012 due to a full-year cash flow contribution from completed property acquisitions and development projects in 2011. The Trust’s earnings profile could also benefit from a potential increase in development activity over the next few years. Although CREIT has an above-average amount of office and industrial lease expiries, DBRS believes that, in the near term, this exposure to re-leasing risk is manageable given improving industrial and office fundamentals in the Trust’s core markets. In addition, CREIT’s portfolio diversification and reasonable retail lease maturities should provide underlying stability to cash flow. While DBRS does not anticipate meaningful property acquisitions in 2012, mainly due to competitive conditions and a limited amount of quality assets being brought to market, CREIT’s conservative balance sheet affords it the ability to make debt-funded acquisitions and keep credit metrics at strong levels. Financial flexibility is also supported by positive free cash flow, undrawn credit facilities and unencumbered assets with a value of $502.9 million.

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

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