DBRS Confirms Calloway Real Estate Investment Trust at STA-3 (high)

DBRS has today confirmed the stability rating of Calloway Real Estate Investment Trust (Calloway or the Trust) at STA-3 (high). The confirmation acknowledges Calloway’s improvement in operating income and interest coverage. However, DBRS notes this improvement remains within the parameters of the current rating category as the rating continues to be constrained by the Trust’s considerable exposure to secondary markets, geographic and tenant concentration. The rating continues to be supported by Calloway’s large and new portfolio of open format, Wal-Mart-anchored retail properties, long average lease term, high occupancy rates and growth prospects through development and earn-outs.

Calloway’s EBITDA increased by 3.2% to $371.9 million in 2013, primarily as a result of income contributions from property acquisitions, completed development projects, earn-outs from SmartCentres during the year and in 2012. Same property net operating income only increased 1% for the year from rent increases as occupancy remained steady at 99.0%.

In terms of financial profile, Calloway funded property acquisitions, developments and earn-outs totalling $468.3 million in 2013, primarily with incremental debt. This caused Calloway’s debt-to-gross book value ratio (including convertible debentures) to increase to 52.5% at the end of 2013 from 49.7% one year earlier. EBITDA interest coverage, however, improved to 2.53 times (including capitalized interest) for 2013 from 2.33 times in 2012 due to the increase in Calloway’s operating income and decrease in weighted average interest rate in 2013 (5.08% vs. 5.39% in 2012).

DBRS expects Calloway will continue to deliver steady growth in operating income and cash flow going forward from recent acquisitions, the completion of current development projects (including the Premium Outlet in Toronto and Montreal) and earn-outs in 2014 and 2015. Developments and earn-outs in 2014 and 2015 are expected to add approximately 253,772 square feet (sf) of leasable space (or 7.9%) to the portfolio and contribute approximately $6 million to net operating income.

Notwithstanding a competitive commercial real estate market, Calloway believes they can make $120 million to $150 million of investments in property acquisitions in 2014. DBRS expects that Calloway will finance its growth in 2014 and 2015 primarily with debt, but is committed to keep its key financial metrics within the parameters of the current rating category.

Although DBRS does not anticipate a rating change in the near to medium term, a material increase in the size of the portfolio, enhanced diversification, and/or decrease in financial leverage that results in an improvement in EBITDA interest coverage (including capitalized interest) to above 3.00 times could result in a positive rating action. On the other hand, weaker operating performance and/or higher financial leverage that leads to EBITDA interest coverage falling below 2.20 times could result in a negative rating action.

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 Entities in the Real Estate Industry, which can be found on our website under Methodologies.

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