DBRS Assigns Ratings of BBB (low) and Pfd-3 (low) to Artis Real Estate Investment Trust, Stable Trends

DBRS has today assigned an Issuer Rating of BBB (low) and a Preferred Trust Units rating of Pfd-3 (low) to Artis Real Estate Investment Trust (Artis or the Trust), both with Stable trends. DBRS notes that the Issuer Rating ranks behind Artis’ property-specific secured debt (i.e., mortgages and revolving credit facilities) held at the Trust level. However, the Issuer Rating ranks ahead of the unsecured subordinated convertible debentures held at the Trust level.

The investment-grade rating reflects the following key strengths: (1) reasonable scale with a mid-sized portfolio that continues to improve in quality with new property additions; (2) a well-diversified portfolio by asset type and geography; (3) a diverse tenant roster including a number of government and other investment-grade tenants; and (4) improving financial profile and credit metrics. Artis’ rating is balanced by the following key challenges: (1) concentration of properties in suburban office and smaller retail formats; (2) exposure to small or secondary markets; (3) limited scale within each asset type segment; and (4) risks associated with growth through acquisition.

Since the beginning of 2010, Artis has achieved considerable earnings growth driven by a series of significant property acquisitions aggregating approximately 16.6 million square feet (or approximately $2.7 billion). This growth has enhanced the quality of the portfolio and its geographic and property diversification, thereby reducing Artis’ earnings volatility. Artis’ operating metrics and earnings profile have also benefited from the Trust’s focus in western Canada, where leasing conditions have been strong for several years.

In terms of financial profile, Artis has decreased overall leverage to 52.4% (on a DBRS-adjusted debt-to-capital basis) as at December 31, 2012, from 60.7% at the end of 2010 by funding its recent growth with a higher proportion of equity than debt. The Trust has also shown improvement in coverage ratios primarily as a result of earnings growth and lower financing costs. DBRS estimates that Artis’ EBITDA (pro forma recent acquisitions) will increase to above $250 million, which should result in pro forma interest coverage of 2.53 times (x) (versus 2.39x in 2012 and 2.08x in 2011). DBRS believes Artis’ key credit metrics have effectively reached levels that are now consistent with the BBB (low) rating category.

The stable rating outlook incorporates DBRS’ expectation that Artis’ earnings will continue to benefit from incremental income associated with recent property acquisitions and robust leasing conditions in the Trust’s western Canadian markets. The Stable outlook also reflects DBRS’ expectation that Artis will continue to exercise prudence with respect to financing future growth and maintain a financial profile that is consistent with the current rating category. DBRS notes that the achievement of a positive rating action for Artis will be less dependent on improving coverage and leverage metrics and more reliant on increasing size and scale while improving overall asset quality.

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, which can be found on our website under Methodologies.