DBRS Confirms H&R Real Estate Investment Trust at BBB, Stable Trend

DBRS has today confirmed the Senior Unsecured Debentures rating of H&R Real Estate Investment Trust (H&R or the Trust) at BBB with a Stable trend. The confirmation follows H&R’s announcement that it has entered into a definitive agreement to acquire 100% of the issued and outstanding units of Primaris Retail Real Estate Investment Trust (Primaris, rated BBB (low) by DBRS) (the Transaction). Unitholders of Primaris will be entitled to elect to receive 1.13 stapled units of H&R or $28.00 cash per unit, subject to a maximum cash amount of $700 million. DBRS notes that the boards of trustees of both Primaris and H&R have unanimously agreed to vote in favour of the Transaction. The Transaction is subject to the approval of 66 2/3 percent of Primaris units voted at a special meeting of Primaris unitholders and a 50.1% majority of H&R units voted at a special meeting of H&R unitholders.

The rating confirmation takes into consideration that the Transaction will meaningfully increase the size and scale of H&R’s portfolio and will transform the Trust into the largest real estate investment trust in Canada. Following the completion of the Transaction, H&R’s portfolio will comprise 330 properties and approximately 59.7 million square feet of office, retail and industrial space, representing an increase of 33%. Primaris’ properties include 35 well-located, major enclosed retail centres in secondary markets and mid-market malls closer to major centres anchored by national retailers. To date, these properties have performed reasonably well, with good occupancy levels and stable tenant bases.

In addition, the Transaction will benefit H&R with enhanced diversification by property, tenant and geography and reduce the Trust’s exposure to the office segment to 48% from 65%, adjusted to include the impact of the Bow. From a business risk perspective, DBRS views the Transaction as slightly positive to neutral for H&R since it continues to increase the size and scale of the portfolio, provides greater diversification and features several high quality mid-market enclosed shopping centres. The Transaction, however, results in a shift away from H&R’s strategy of acquiring single-tenant properties with long-term leases, thereby introducing greater volatility through an exposure to the discretionary retail segment and higher lease rollovers. These malls also face significant competition from other growing retail formats, such as power centres and big-box retailers, which continue to expand their presence in Canada. Moreover, DBRS believes that H&R’s success will depend largely on its ability to effectively integrate this Transaction following the significant acquisition and development activity (including the Bow) that the Trust has been involved with over the past few years.

DBRS estimates that the financial impact will result in a decline in leverage to approximately 60.9% on a debt-to-capital basis from 65.3%, while pro forma EBITDA interest coverage is expected to improve modestly to 2.3 times from 2.2 times, including contributions from the Bow. In DBRS’s view, these key credit metrics are well placed within the BBB rating category, acknowledging the slight improvement to the Trust’s business profile. As a result, DBRS has tolerance for a slight increase in leverage within the current rating category. DBRS notes that any changes to the terms and conditions of the Transaction could result in H&R’s rating being placed Under Review.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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