DBRS Confirms Primaris Retail REIT at BB (high), Changes Trend to Positive

DBRS has today confirmed the Issuer Rating of Primaris Retail Real Estate Investment Trust (Primaris or the Trust) at BB (high) and has changed the trend to Positive from Stable. The trend change is supported by DBRS’s expectation that Primaris will continue to increase the size and scale of its portfolio of major enclosed retail centres in secondary markets and mid-market malls closer to major centres, further enhance asset quality and tenant diversification, while improving its key credit metrics to levels that are more in-line with the BBB (low) rating category.

Over the past year, Primaris has achieved significant portfolio growth through property acquisitions, mainly consisting of five enclosed shopping centres from Ivanhoe Cambridge Inc. (the Ivanhoe Portfolio) in 2011 and more recently Driftwood Mall in Q2 2012. These properties have also enhanced the overall quality of the portfolio and have modestly improved Primaris’ tenant and property diversification. In addition, tenant diversification and quality has improved with the addition of Target Canada Co. stores to the Trust’s portfolio. Of the Canadian sites selected, nine of Primaris’ 13 Zellers stores were chosen and will be converted into Target stores, opening in 2013.

With the addition of Target to the Trust’s portfolio, Primaris has meaningfully reduced its exposure to lower creditworthy anchor tenants, namely HBC and Sears Canada, which should enhance cash flow stability going forward. Although exposure to these tenants remains high and a rating challenge, DBRS believes the presence of Target at the selected properties will increase customer traffic and improve sales performance at these properties. Going forward, DBRS expects continued growth in net operating income driven by full-year cash flow contributions from acquisitions in 2011 and 2012 and, to a lesser extent, from higher average rental rates on releasing activity.

From a financial perspective, Primaris key credit metrics have shown improvement over the last year within the BB (high) category. Subsequent to Q1 2012, Primaris issued $115 million of trust units to pay down amounts drawn on the credit facility that were used to fund the acquisition of Driftwood Mall and to repay a $21 million mortgage against Eglinton Square. As a result, DBRS estimates pro forma debt levels have declined to approximately 42.7% on DBRS adjusted total debt-to-capital ratio and also expects EBITDA interest coverage ratio to improve with continued growth in cash flow. EBITDA interest coverage is also expected to benefit from lower interest expense as a result of the potential conversion of convertible debentures into equity and positive refinancing activity on maturing debt. DBRS would view an improvement in the EBITDA interest coverage ratio above 2.40 times as more in-line with the BBB (low) rating category. Primaris also has more than sufficient financial flexibility and liquidity, mainly consisting of a fully undrawn credit facility and cash on hand to fund its capital requirements and development costs.

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

The applicable methodology is Rating Real Estate Entities (April 2011), which can be found on our website under Methodologies.

For the definition of Issuer Rating, please refer to Rating Definitions under Rating Policy on www.dbrs.com.

Issuer ratings apply to all general senior unsecured obligations of the issuer in question.