DBRS Confirms Artis REIT at BBB (low) and Pfd-3 (low), Stable Trends

DBRS Limited (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 over the last few years. The ratings continue to be supported by Artis’s 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.

EBITDA increased by 6.2% (excluding straight-line rent and other non-recurring items) to $226.6 million for the year-to-date Q3 2014 compared with a year earlier, mainly as a result of recent acquisition activity. In addition, Artis has maintained relatively stable debt and coverage ratios during this period. The stable rating outlook incorporates DBRS’s expectations that Artis will continue to deliver steady growth in operating income in 2015 in the mid-single-digit range, primarily as a result of recent acquisitions, the completion of current redevelopment projects and higher rental rates on leasing activity. DBRS also believes that 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 because of the current competitive pricing environment for real estate, DBRS expects that Artis will place a greater focus on redevelopment and development projects in 2015. DBRS believes that Artis will continue to exercise prudence with respect to financing future growth and maintaining 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.

These ratings are endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Entities in the Real Estate Industry (October 2013), and Preferred Share and Hybrid Criteria for Corporate Issuers (January 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link or by contacting us at info@dbrs.com.