DBRS Confirms Cominar REIT at BBB (low), Trend Stable

DBRS has today confirmed the rating of Cominar Real Estate Investment Trust’s (Cominar or the Trust) Senior Unsecured Debentures at BBB (low) with a Stable trend. The rating continues to be supported by Cominar’s large commercial real estate portfolio and strong position in primary Quebec markets. The rating also continues to be limited by Cominar’s considerable geographic concentration in Quebec and its significant exposure to Montreal’s mature industrial market.

Net rental income increased by 18.1% to $366.9 million in the last twelve months (LTM) ended Q1 2014 from 2012, driven by industrial and retail property acquisitions in the GTA and Quebec and the completion of three development properties, partially offset by property dispositions. Reported same-property net operating income (NOI) decreased by 2.4% in Q1 2014 when compared to the same period a year earlier, due largely to tenant bankruptcies and a decline in occupancy in the Trust’s Montreal area office segment.

In terms of financial profile, cash flow from operations growth in the LTM ended Q1 2014 was sufficient to fund the Trust’s modestly increasing distribution payments. Acquisition activity on a cash flow basis declined to $388 million during the LTM ended Q1 2014 versus $1.2 billion in 2012. The Trust funded its investment mainly with debt (approximately $228 million) and equity ($55 million). Despite the increase in debt, Cominar’s key financial metrics remained relatively stable (i.e., debt-to-EBITDA of 9.4 times (x) in the LTM ended Q1 2014 unchanged from 2012, and EBITDA interest coverage (including capitalized interest) of 2.43x in the LTM ended Q1 2014 versus 2.41x in 2012), primarily as a result of growth in operating income and or interest expense savings from refinancing debt at lower market rates.

DBRS expects Cominar will continue to deliver steady growth in net rental income and cash flow in 2014 and 2015 based primarily on recent acquisitions, the completion of an office building adjacent to the Place Laval complex (expected to be 100% occupied by a Government of Quebec agency under a long-term lease), and to a lesser extent the re-leasing of properties at higher rents. Reported same-property NOI is expected to more accurately reflect Cominar’s organic growth and to come in at around 2% in 2014 and 2015, based on contractual rent step-ups and higher average rental rates on lease renewals.

As property acquisitions are expected to remain below levels achieved over the past few years due to the current competitive pricing environment for real estate, DBRS expects Cominar will focus on upgrades and expansions to its existing properties in 2014. DBRS expects Cominar will fund its growth initiatives in 2014 primarily with debt and to a lesser extent, incremental equity, such that financial metrics should remain within a range that is appropriate for the current rating category (i.e., EBITDA interest coverage around 2.40x).

Although DBRS does not anticipate a rating change in the near to medium term, a material increase in the size of the portfolio with an associated improvement in geographic diversification, and/or decrease in financial leverage that results in an improvement in EBITDA interest coverage (including capitalized interest) to above 3.00x 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 2.20x 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.

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

The applicable methodology is Rating Entities in the Real Estate Industry (October 2013), which can be found on our website under Methodologies.