DBRS Assigns Rating of BBB (low) to Cominar Real Estate Investment Trust with Stable Trend

DBRS has today assigned an Issuer Rating of BBB (low) with a Stable trend to Cominar Real Estate Investment Trust (Cominar or the Trust). DBRS notes that the Issuer Rating ranks behind Cominar’s property-specific secured debt (i.e., mortgages and revolving credit facilities) held at the Trust level. The Issuer Rating, however, ranks ahead of the unsecured subordinated convertible debentures held at the Trust level. The rating takes into consideration the Trust’s following strengths: (1) a large commercial real estate portfolio that features several prominent high-quality properties, (2) a well-diversified portfolio by asset type and tenant, (3) consistent occupancy levels in the mid-90% range and (4) expectations of improved key credit metrics over the medium term. The rating also takes into consideration the following challenges: (1) considerable geographic concentration within the Trust’s two largest markets (Québec City and Montréal), representing 76% of combined net operating income (NOI), (2) exposure to soft industrial fundamentals in Montréal and (3) a small retail portfolio with limited scale and operating efficiencies.

Since its inception in 1998, Cominar has consistently achieved earnings growth driven by a series of property acquisitions, completed development projects and, more recently, mergers and acquisitions (M&A) activity. In addition, Cominar’s diversified portfolio of office, industrial/mixed-used and retail properties and broad tenant base have contributed to earnings stability and mitigated some of the volatility associated with geographic concentration. The quality of Cominar’s portfolio has contributed to solid occupancy in the mid-90% range since inception. This is also reflective of Cominar’s property locations and the stable performance of its diverse tenant base that is representative of broad business activity. Historically, Cominar has operated with conservative financial management, and since 2007, the Trust used a greater proportion of debt to fund portfolio growth. However, the Trust has been effective at growing cash flow to maintain reasonably good coverage ratios.

On March 1, 2012, Cominar closed the transformational acquisition of Canmarc Real Estate Investment Trust (Canmarc or the Acquisition) for a total of approximately $1.9 billion (including $913 million of assumed mortgages and $213 million of bank indebtedness).

Going forward, DBRS expects the Acquisition to have a positive impact on Cominar’s business risk profile, with a meaningful increase to the size and scale of the Trust’s operations and corresponding operating and cost synergies. In addition, DBRS believes the Acquisition will likely enhance the stability of earnings through an improvement in operating metrics, property diversification and modestly enhanced geographic diversification. Pro forma the Acquisition, Cominar’s portfolio occupancy is expected to improve to 94.5% from 93.6% for the year ended December 31, 2011, mainly due to contributions of high office and retail occupancy levels in Canmarc’s portfolio and a lower exposure to Cominar’s industrial segment. In 2012, DBRS expects Cominar to achieve same property NOI growth in the 1% to 2% range, driven by higher average rental rates on lease renewals in the retail and office segments, which should more than offset continued softness in the Trust’s industrial segment. DBRS expects the Acquisition to further enhance cash flow stability by extending Cominar’s average lease term to maturity to 5.1 years from 3.9 years, increasing the Trust’s exposure in underweighted markets and by adding new Western Canadian markets. The Acquisition is also expected to contribute to significant net rental income and EBITDA growth in 2012. DBRS estimates EBITDA to increase by $122.5 million, or 69%, to approximately $298.8 million on an annual basis.

From a financial profile perspective, the Acquisition was funded with $785 million of equity and a new $550 million revolving credit facility, of which a portion was utilized to refinance the Trust’s previous credit facility. As a result, DBRS estimates that Cominar’s debt-to-gross book value (GBV) increased to 54.5% from 44.6%, and EBITDA interest coverage (including capitalized interest) declined to 2.28 times from 2.40 times on a pro forma basis from December 31, 2011. Although credit metrics will temporarily be pressured following the Acquisition, DBRS expects Cominar to gradually reduce debt levels and for coverage ratios to recover to a level that is appropriate for the current rating category. Over the medium term, DBRS expects Cominar’s debt-to-GBV ratio to return closer to 50%, primarily through the issuance of equity and/or convertible debenture conversions. In addition, DBRS expects the Trust’s coverage ratios to recover above 2.40 times, a level DBRS considers appropriate for the BBB (low) rating category. As such, DBRS expects Cominar to be well placed in the BBB (low) rating category over the medium term. However, over the longer term, the credit risk profile of the Trust could benefit from continued improvement in scale and geographic diversification.

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.