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

DBRS has today confirmed the ratings of Artis Real Estate Investment Trust’s (Artis or the Trust) Senior Unsecured Debentures at BBB (low) and Preferred Trust Units at Pfd-3 (low), all with Stable trends. The rating confirmation reflects the expected improvement in key financial metrics and growth in operating income driven mainly by significant property acquisitions since DBRS assigned its ratings in 2013.

The ratings continue to be supported by Artis’ mid-sized and diversified commercial real estate portfolio, diverse tenant base and conservative financial profile. However, they remain constrained by a concentration of properties in suburban office and smaller retail formats, as well as the Trust’s exposure to small or secondary markets, limited scale within each asset type segment and high proportion of secured debt.

Net rental income increased by 9.2% (excluding straight-line rent and other non-recurring items) to $154 million in H1 2014 from a year earlier, mainly as a result of acquisition activity in 2014 (645,502 sq. ft.) and 2013 (approximately 1.8 million sq. ft.) In addition, reported same-portfolio net operating income increased by 3.3% in Q2 2014 when compared to the same period a year earlier, due to stronger results in the industrial and retail segments and positive foreign exchange, partially offset by higher vacancies during the period. In terms of financial profile, Artis used a higher proportion of equity than debt to fund property acquisitions and redevelopment projects over the past year. This caused total debt-to-gross book value assets (on a fair value basis, including convertible debentures) to modestly decline to 48.6% as at Q2 2014 from 49.0% a year earlier. EBITDA interest coverage remained strong during the period and has also benefited from interest expense savings and higher operating income over the last several years.

The stable rating outlook incorporates DBRS’s expectations that Artis will continue to deliver steady growth in operating income in 2014 and 2015 in the high single-digit range, primarily due to recent acquisitions, the completion of current redevelopment projects and higher rental rates on leasing activity. In addition, recent property acquisitions will likely enhance cash flow stability going forward through an improvement in overall portfolio quality, tenant profile and property diversification. 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 Artis will place a greater focus on redevelopment and development projects in 2015. DBRS expects that Artis will continue to exercise prudence with respect to financing future growth and maintain a financial profile that is consistent with the current rating category.

DBRS notes that the achievement of a positive rating action for Artis will be less dependent on improving coverage and leverage metrics and more reliant on increasing size and scale while improving overall asset quality. On the other hand, weaker-than-expected operating and earnings performance and/or higher financial leverage that leads to EBITDA interest coverage falling below 2.20 times on a sustained basis 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.