DBRS Confirms CREIT at BBB, Stable Trend

DBRS has today confirmed the rating of Canadian Real Estate Investment Trust’s (CREIT or the Trust) Senior Unsecured Debentures at BBB with a Stable trend. The rating continues to be based on CREIT’s well-diversified portfolio, good quality retail properties, conservative financial profile and high occupancy rates. The rating, however, continues to be constrained primarily by the Trust’s size and scale and high proportion of secured debt.

EBITDA increased by 13.4% to $286 million for the last twelve months ended June 30, 2014, from YE2012 primarily due to income contributions from property acquisitions totalling $199.1 million in 2013. To a lesser extent, this growth is also attributable to the transfer of completed development projects to income-producing property status and modest same-property net operating income (NOI) growth during the period. In H1 2014, same portfolio NOI growth of 1.2% (on a cash basis) benefited primarily from rental rate increases in Western Canada and an increase in occupancy rates for industrial properties in the Alberta and Atlantic regions, which were partially offset by higher office vacancies. In terms of financial profile, CREIT mainly used equity, cash from modest non-core asset sales and its free cash flow to fund growth expenditures during the year. This caused debt-to-gross book value assets (on a cost reset value basis) to decline modestly to 47.3% as at Q2 2014, from 49% a year earlier. EBITDA interest coverage (including capitalized interest) also remained strong for the current rating category and benefited from interest expense savings and higher operating income during the period.

The Stable rating outlook reflects DBRS’s expectation that CREIT will continue to deliver steady growth in EBITDA in 2014/2015 based primarily on full-year income contributions from recent property acquisitions and completed development projects. While the pace of acquisitions is expected to slow in the near term due to a very competitive environment for high quality properties, DBRS expects CREIT to instead place an increasing focus on its development program. CREIT has approximately 3.5 million square feet (sf) (owned interest) of properties in its development program, primarily with strategic and experienced development partners, reducing some development risks. A majority of the developments consist of well-located industrial properties and retail space situated in primary and secondary markets, all of which are complementary to CREIT’s current portfolio profile. DBRS estimates these developments could add $45 million to NOI over the next five to seven years.

CREIT’s development projects are expected to be funded in a financially prudent manner and DBRS does not anticipate any material shifts in CREIT’s leverage and capital structure in the near term. That said, DBRS could tolerate a moderate increase in leverage within the parameters of the current rating category. In DBRS’s view, the achievement of a positive rating action by CREIT would be less dependent on improvement in coverage and leverage metrics and would be based on a significant increase in the size and scale of the Trust’s portfolio while maintaining or improving its asset quality and diversification and/or lowering the proportion of secured debt.

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.