DBRS Assigns Provisional Rating of BBB (high) to CT REIT

DBRS has today assigned a provisional Issuer Rating of BBB (high), with a Stable trend, to CT Real Estate Investment Trust (CT REIT or the Trust).

The rating action follows the announcement by Canadian Tire Corporation, Limited (CTC or Canadian Tire; rated BBB (high) with a Stable trend) and CT REIT that the Trust has filed and obtained a receipt for a preliminary prospectus in respect of its initial public offering (IPO) of Trust units with the securities regulatory authorities of all provinces and territories in Canada. CTC views the creation of the Trust as a preferred structure by which it can continue to own a significant interest in its Canadian Tire Retail Store properties, and believes that continuing to own an effective majority ownership interest in the Trust is consistent with its long-term strategy.

CTC will receive an effective majority equity interest in CT REIT, a hybrid security (treated as debt by DBRS) and cash raised from the IPO, in exchange for its real estate assets. The portfolio of properties to be acquired by the Trust from CTC on closing will consist of 256 properties, totalling approximately 19 million square feet of gross leasable area (GLA), with an appraised value of approximately $3.7 billion to $3.8 billion.

DBRS’s confirmation of Canadian Tire’s BBB (high) ratings and assignment of an equivalent Issuer Rating to CT REIT of BBB (high) are based largely on the following:

1. Canadian Tire will own approximately 85% of CT REIT’s equity on closing (before any overallotment is exercised) and effectively control the Trust as its major shareholder.
2. Canadian Tire will be the Trust’s dominant tenant for the foreseeable future, representing approximately 95.7% of the Trust’s pro forma annual base minimum rent (97.4% if all Canadian Tire banner stores are included) at the closing of the IPO.
3. CT REIT’s portfolio of properties will represent at closing approximately 72% of all of Canadian Tire’s owned real estate assets by square feet prior to forming the Trust.
4. The appraised value of CT REIT’s total assets at IPO will represent approximately 30% of Canadian Tire’s consolidated assets as shown on its balance sheet at June 29, 2013.
5. CT REIT’s leases for Canadian Tire retail stores will have a long weighted-average initial term of approximately 16 years and CT REIT’s lease for Canadian Tire’s distribution centre will have a long initial lease term of 17 years.

DBRS believes the above factors effectively align the credit risk profiles of Canadian Tire and the Trust (see Canadian Tire report dated October 23, 2012, for rating considerations). However, DBRS notes that should Canadian Tire’s ownership and/or control in the Trust diminish materially over time, CT REIT’s credit risk profile could begin to be assessed on a stand-alone basis. DBRS believes the Trust possesses attributes (i.e., size, asset quality, geographic diversification, financial leverage and interest coverage) that could make it a weak investment-grade on a stand-alone basis, but notes the Trust’s rating could not exceed CTC’s credit rating, should CTC remain the predominant tenant.

The rating of the Trust could also move independently of Canadian Tire, without a meaningful reduction of ownership by CTC, should the Trust change materially in terms of size, portfolio composition and tenant profile over the longer term. In this scenario, Canadian Tire’s rating would still have significant influence on the Trust as the controlling parent; however, the magnitude and nature of the diversification could allow the Trust’s ratings to deviate from Canadian Tire’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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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