DBRS Confirms Granite at BBB with Stable Trend

DBRS has today confirmed the rating of Granite Real Estate Investment Trust’s (Granite or the Trust) Senior Unsecured Debentures at BBB with a Stable trend. The confirmation acknowledges that Granite is executing its strategic plan in accordance with DBRS’s expectations while maintaining stable operating performance.

On October 27, 2011, DBRS confirmed Granite’s Senior Unsecured Debentures rating at BBB with a Stable trend, following the approval of a multi-year strategic plan. The major elements of the strategic plan included conversion from a corporation to a Canadian real estate investment trust (REIT), increasing the annual dividend from $0.40 per share to $2.00 per unit, targeting leverage of up to 50% of total capital (including subordinated securities) and focusing on growth opportunities with new industrial tenants, thereby enhancing tenant and geographic diversification. Since then, Granite completed its conversion from a corporation to a REIT (on January 3, 2013), increased its annual distribution to $2.10 per unit, completed two small acquisitions and replaced the previous $50 million credit facility with a new $175 million of credit facility. In terms of operating performance, Granite remained steady through the course of 2012, generating EBITDA of $156.3 million despite flat rental revenue. Rental revenue reflects contractual rental rate increases, completed projects on stream and releasing activities that were largely offset by unfavourable foreign currency translation.

Granite’s BBB rating continues to reflect the following credit strengths: (1) a large industrial portfolio with a strong major tenant, (2) favourable lease arrangements and (3) relatively conservative financial metric targets, including a low proportion of secured debt. The rating also considers the following challenges: (1) tenant concentration (Magna), (2) specific use facilities in much of the European portfolio, (3) geographic concentration in Austria and the Greater Toronto Area (GTA) and (4) high proportion of lease expirations in 2013 and 2017.

Going forward, DBRS expects Granite to continue executing its strategic plan and to ramp up its acquisition program in 2013. DBRS believes the new acquisitions, coupled with developments coming on stream and contractual rental increases, should result in moderate growth in Granite’s rental revenue. However, DBRS notes that Granite has a high proportion of leases expiring in 2013, which will expose the Trust to above-average re-leasing risks this year. DBRS expects Granite to pursue growth through new investments and acquisitions, while remaining focused on high credit quality tenants in the industrial and manufacturing sector with long-term, triple-net leases. The Trust’s growth initiatives should enhance Granite’s tenant and geographic diversification and result in greater cash flow stability over time, thereby entrenching the Trust more firmly in the BBB rating category.

From a financial standpoint, DBRS believes Granite will use higher leverage to fund portfolio growth, eventually reaching 40% to 50% on a total debt-to-capital basis (including subordinated convertible debt and preferred equity). DBRS notes that Granite continues to have covenants that restrict secured debt to 15% of certain real estate assets. DBRS’s rating incorporates Granite’s financial leverage target and the expectation for the Trust to operate with liquidity and financial metrics that are sound for the BBB rating category (i.e., EBITDA interest coverage of at least 3.0 times over the long term).

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.