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

DBRS has today confirmed the Senior Unsecured Debentures of Cominar Real Estate Investment Trust (Cominar or the Trust) at BBB (low) with a Stable trend. The confirmation follows Cominar’s announcement of a property portfolio acquisition, including 15 properties in Québec and Ontario from Ivanhoe Cambridge, a real estate subsidiary of the Caisse de dépôt et placement du Québec, for a purchase price of approximately $1.527 billion, excluding transaction costs (the Acquisition). The acquired portfolio includes ten enclosed regional shopping centres, one retail complex, three office buildings and one light industrial property totalling 5.7 million leasable square feet. Closing is expected to occur on or about October 1, 2014.

DBRS expects Cominar to fund the Acquisition with unsecured bridge credit facilities aggregating $950 million, $250 million of new mortgages bearing a weighted-average interest of 4.0% and term of ten years, and $81 million drawn on its new $350 million unsecured credit facility. In conjunction with the Acquisition, Cominar has also announced a $250 million equity issuance at a price of $19.00 per trust unit and a $250 million equity private placement to Ivanhoe Cambridge at a price of $19.00 per trust unit, representing a pro forma equity stake of approximately 8.5% in Cominar.

In DBRS’s view, the Acquisition has a neutral impact on Cominar’s credit risk profile, as it enhances the Trust’s size and scale, portfolio quality and improves asset type and tenant diversification. It also results in lower secured debt levels as proportion of total debt. These positive attributes, however, are offset by an increase in leverage and a modest increase in geographic concentration in Québec, which remain limiting factors for the current rating.

The Acquisition is expected to increase Cominar’s portfolio leasable area significantly by 25%, or approximately 5.7 million square feet. In addition, DBRS estimates pro forma EBITDA to increase by 29% to $469 million, based on an estimated average capitalization rate of 6.5%. The acquired retail properties consist of ten enclosed regional shopping centres and one retail complex that are well-occupied (96.7%, versus Cominar’s portfolio occupancy of 93.9% as at June 30, 2014) and anchored with nationally recognized retailers (such as Hudson’s Bay, Sears or Target). The shopping malls are well-maintained and mainly located in primary and secondary Québec markets, with one located in Mississauga, Ontario. The remaining acquired properties include a fully occupied light industrial property and an office property (both of which are leased to a single tenant), a Class A office property located in downtown Toronto and office and retail property development.

In terms of financial profile, the Acquisition is expected to have a temporarily negative impact on the Trust’s balance sheet ratios. DBRS forecasts Cominar’s debt-to-gross book value (GBV) assets ratio (including convertible debentures) to increase to 57.5% from 53.8% as at June 30, 2014. Pro forma EBITDA interest coverage, however, is expected to increase modestly to 2.48 times from 2.44 times and secured debt-to-total debt ratio is expected to decline to 46.3% from 54.8%.

However, DBRS takes comfort in the Trust’s track record of integrating large acquisitions and returning financial metrics to pre-acquisition levels. Cominar has indicated that its objective is to replace the bridge facilities over time with new mortgages and separate issuances of senior unsecured debentures totalling $500 million and its intention is to deleverage its balance sheet through convertible debenture conversion and equity issuance. As a result, DBRS expects debt-to-GBV to decrease below 55% by the end of Q1 2015. DBRS notes that the Trust continues to have a long-term target range of 50%, which is reflected in the current rating.

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.