DBRS Assigns Rating of BBB to Choice Properties REIT

DBRS has today assigned an Issuer Rating of BBB to Choice Properties Real Estate Investment Trust (CP REIT or the REIT) and a provisional rating of BBB to CP REIT’s proposed new Senior Unsecured Debenture offerings, all with Stable trends.

The rating actions follow the announcement by Loblaw and CP REIT that the REIT has filed and obtained receipt for two preliminary prospectuses in respect of its initial public offering (IPO) of trust units and a concurrent public offering of two series of Senior Unsecured Debentures with the securities regulatory authorities of all provinces and territories in Canada. Loblaw believes the proposed plan will unlock value for both Loblaw shareholders and prospective unitholders, while retaining a high degree of operational flexibility for Loblaw, as the REIT’s key tenant.

CP REIT will issue equity and debt to Loblaw in exchange for the real estate assets to be contributed by Loblaw. The portfolio of properties to be acquired by the REIT from Loblaw on closing will consist of 425 properties totalling 35.3 million square feet of gross leasable area (GLA), which DBRS estimates has a market value of approximately $7 billion. The REIT will offer debentures concurrent with the IPO units, the proceeds of which will be used to repay a portion of the indebtedness owing to Loblaw. The debentures and remaining notes owing to Loblaw will be senior unsecured debt of the REIT and rank pari passu.

DBRS’s confirmation of Loblaw’s BBB ratings and assignment of an equivalent Issuer Rating to CP REIT is based largely on the fact that:

-- Loblaw will own and control over 80% of CP REIT. In addition, George Weston Limited, the parent of Loblaw, will acquire $200 million of units on closing (approximately 6% of outstanding units).
-- Loblaw will be the REIT’s most significant tenant for the foreseeable future, representing approximately 91% of its annual base minimum rent and 88% of its GLA on closing.
-- The REIT’s portfolio of properties represents approximately 75% of Loblaw’s owned real estate.
-- The REIT’s leases with Loblaw will have a weighted-average remaining lease term of 14 years.
DBRS believes the above factors effectively align the credit risk profiles of Loblaw and the REIT. However, DBRS notes that should Loblaw’s ownership and/or control in the REIT diminish materially over time, CP REIT’s credit risk profile could begin to be assessed on a stand-alone basis. DBRS believes the REIT possesses attributes of an investment-grade profile on a stand-alone basis (i.e., size, asset quality, geographic diversification, financial leverage and interest coverage), but could not exceed Loblaw’s credit rating should Loblaw still be the predominant tenant.

The rating of the REIT could also move independent of Loblaw, without a meaningful reduction of ownership by Loblaw, should the REIT materially grow and diversify its tenant base over the longer term. In this scenario, Loblaw’s rating would still have significant influence on the REIT as the controlling parent; however, the magnitude and nature of the diversification could allow the REIT’s ratings to deviate from Loblaw’s.

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.