DBRS Confirms Cominar REIT at BBB (low), Stable

DBRS has today confirmed the Issuer Rating and Senior Unsecured Debentures rating of Cominar Real Estate Investment Trust (Cominar or the Trust) at BBB (low) with a Stable trend. The confirmation acknowledges Cominar’s recent acquisitions and associated improvement in scale, while reflecting the fact that the Company remains highly concentrated in Québec, which is a limiting factor for a potential positive rating action. The rating continues to reflect Cominar’s: (1) large commercial real estate portfolio, which features several prominent high-quality properties; (2) well-diversified portfolio by asset type and tenant; (3) occupancy levels consistently in the mid-90% range; and (4) relatively strong interest coverage. The rating also continues to reflect the Trust’s: (1) considerable concentration in Québec; (2) exposure to Montréal’s mature, low-growth industrial market; (3) small retail portfolio, which results in limited economies of scale; and (4) high level of secured debt as a proportion of total debt.

Cominar displayed a significant increase in earnings in 2012 that was in line with DBRS expectations. The growth was primarily the result of approximately 11 months of earnings contribution from the Canmarc REIT acquisition (January 27, 2012), and three months of earnings contribution from properties acquired from GE Capital Real Estate (September 14, 2012). DBRS notes that Cominar subsequently acquired 18 industrial properties located in the South Shore of Montréal and one office property in Montréal in Q1 2013. Together, these investments have considerably increased Cominar’s overall size, and moderately enhanced its geographic diversification. In terms of organic performance, the Trust’s same-property net operating income was flat in 2012, and modestly higher in Q1 2013 (+1.4% yoy). The increase in the latter period was driven by a modest recovery in occupancy in the Trust’s industrial portfolio.

In terms of financial profile, Cominar has funded its growth strategy in a balanced manner in order to achieve DBRS-adjusted interest coverage above 2.40 times (x) and its target debt-to-gross book value (GBV) of approximately 50%. As at March 31, 2013, Cominar’s debt-to-GBV ratio was 51.2%, and the last 12 months DBRS-adjusted EBITDA interest coverage ratio was 2.46x.

DBRS estimates Cominar’s EBITDA will grow to $330 million to $350 million in 2013, primarily based on full-year contributions from acquisitions made in 2012, and a contribution of approximately $10 million from the South Shore industrial properties acquired in early Q1 2013. DBRS believes Cominar’s earnings in 2014 and 2015 could benefit from the Trust’s relatively high proportion of lease expiries that currently possess below-market rental rates. The Stable trend reflects DBRS’s expectation that Cominar will aim to continue improving geographic diversification through property acquisitions and new investments while maintaining its financial metric targets. DBRS notes that any positive rating action would be based on Cominar achieving meaningful enhancement in geographic diversification outside of the province of Québec, which DBRS believes will be difficult to achieve in the near 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.