DBRS Confirms Cominar Real Estate Investment Trust at BBB (low), Stable Trend

DBRS has today confirmed the rating of Cominar Real Estate Investment Trust’s (Cominar or the Trust) Senior Unsecured Debentures at BBB (low) with a Stable trend following the Trust’s July 31, 2012, announcement that it will acquire 68 office and industrial properties totaling 4.3 million square feet (sf) from GE Capital Real Estate for $697 million (the Acquisition).

The confirmation is supported by expected improvements to Cominar’s portfolio size and scale, diversification by geography, and the addition of a few high-quality government-leased office properties in the Ottawa region. The confirmation also takes into consideration the fact that a significant portion of the acquired portfolio has lower operating metrics than Cominar’s existing portfolio and also introduces incremental exposure to some challenging markets, such as the Montréal and Québec City industrial sectors. In terms of financial profile, the Trust’s initial rating of BBB (low) incorporated an expectation for leverage to decline to 50% debt-to-gross book value (GBV), and for the coverage ratio to improve to above 2.40 times (x) over the medium term. While this Acquisition temporarily increases leverage, DBRS still expects Cominar to achieve these key metrics levels within a reasonable time frame (i.e., by the end of 2013).

The Acquisition includes approximately $30 million of assumed mortgages, with the remainder financed through Cominar’s existing bank facilities, a new interim bank facility and a $250 million issuance of trust units. DBRS estimates that this Acquisition will contribute approximately $45 million in net operating income (NOI), representing a stabilized cap rate of 6.7%. The acquired portfolio comprises mainly mid-height suburban office buildings, a few government-leased office buildings, and single-storey light industrial properties comparable to Cominar’s existing portfolio. On average, the properties have an occupancy level of 91.1% and a lease term to maturity of 3.8 years. These properties are diversified across three markets, including Ottawa, Montréal and Québec City.

Although this Acquisition does increase Cominar’s exposure to some challenging markets (the Montréal and Québec City industrial sectors) and modestly pressures pro forma occupancy levels to 94.2%, the Acquisition will increase the size and scale of Cominar’s portfolio while enhancing geographic diversification. Pro forma the Acquisition, Cominar’s overall portfolio is expected to grow to approximately 35 million sf, an increase of 14% to the asset base, which DBRS considers to be within the midsize range relative to its peers. From a diversification standpoint, the Acquisition will increase Cominar’s presence in Ontario from 5% to 11% of NOI on a pro forma basis. While Cominar’s portfolio will still be heavily focused in the province of Québec (pro forma 74% of NOI), the Acquisition highlights the Company’s strategic direction to gradually improve its geographic reach. Going forward, DBRS expects the Company to remain acquisitive in a prudent manner as opportunities present themselves.

From a financial perspective, Cominar’s debt-to-GBV is expected to increase temporarily to 53% due to the additional debt assumed from the Acquisition. However, DBRS expects the debt ratio will revert toward 50% over time through a combination of earnings growth, the potential conversion of convertible debentures, and further equity issuances as required. In addition, DBRS expects the Company’s coverage ratio to improve to above the 2.40x range, a level DBRS considers appropriate for the BBB (low) rating category.

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

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