DBRS Confirms Granite REIT Holding’s Senior Unsecured Debentures at BBB, Stable Trend

DBRS has today confirmed the rating of Granite REIT Holdings Limited Partnership’s Senior Unsecured Debentures at BBB with a Stable trend. The rating is based on the credit risk profile of Granite Real Estate Investment Trust (Granite REIT) and Granite REIT Inc. (collectively, Granite or the Trust), as the senior unsecured debentures are fully and unconditionally guaranteed by the Trust. The rating confirmation acknowledges the Trust’s recent diversification efforts, improving portfolio quality and lease extensions at key facilities in Austria. However, the rating continues to be constrained by the Trust’s significant tenant and geographic concentration and portfolio size relative to higher-rated investment-grade peers.

Granite continues to execute on its strategic plan in accordance with DBRS’s expectations. The major elements of Granite’s strategic plan announced in late 2011 include a conversion from a corporation to a REIT, revised distribution policy, enhanced diversification through portfolio growth and increasing leverage. Over the next few years, Granite is expected to ramp up its acquisition program. Granite’s management has stated its plan to acquire properties with a value of approximately $1 billion over the next three to four years. Granite is currently seeking high-quality logistics and distribution industrial properties located primarily in core European and U.S. markets with a cap rate range between 6.0% and 7.0%. DBRS believes the new acquisitions, coupled with developments coming on stream and selective property dispositions, should continue to enhance earnings stability through a gradual improvement in asset quality and geographic and tenant diversification, thereby entrenching the Trust more firmly in the BBB rating category.

In addition, recent lease extensions at core industrial properties in Austria have substantially reduced Granite’s releasing exposures, which should stabilize earnings going forward. DBRS also expects Granite will use a higher proportion of debt to fund portfolio growth, eventually reaching 40% to 50% on a total debt-to-capital basis (including subordinated convertible debt and preferred equity) as indicated in its strategic plan.

DBRS’s rating incorporates Granite’s financial leverage target and the expectation for the Trust to operate with liquidity and financial metrics that are strong for the current rating category (i.e., EBITDA interest coverage of at least 3.0 times over the long term). DBRS notes that the current rating also incorporates the expectation for the REIT to not have more than 10% to 20% of secured debt-to-total-debt upon achieving its targeted leverage levels.

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.