DBRS Confirms Calloway REIT at BBB, Stable Trend

DBRS Limited (DBRS) has today confirmed the Senior Unsecured Debentures rating of Calloway Real Estate Investment Trust (Calloway or the Trust) at BBB with a Stable trend. The confirmation acknowledges Calloway’s growing unencumbered asset base and improvement in operating income and interest coverage. However, DBRS notes that these metrics remain within the parameters of the current rating category, as the rating continues to be constrained by the Trust’s considerable exposure to secondary markets, high geographic concentration as well as tenant concentration and high secured debt levels. The rating continues to be supported by Calloway’s large and relatively new portfolio of open format, Wal-Mart-anchored retail properties, long-term lease profiles, high occupancy rates and growth prospects through development and earn-outs.

DBRS expects that Calloway will continue to deliver steady growth in operating income and cash flow primarily from recent acquisitions, development projects (including the Premium Outlets in Toronto and Montréal) and earn-outs. Developments and earn-outs in 2015 are expected to add approximately 273,000 square feet of leasable space (or 1.0%) to the portfolio and contribute approximately $5.6 million to net operating income.

DBRS expects Calloway to place greater focus on development and redevelopment opportunities (e.g., Vaughan Metropolitan Centre in Toronto and Place Bourassa in Montréal) and less so on acquisitions, because of the increasingly competitive pricing environment for quality retail properties. Calloway is expected to take advantage of the low interest rate environment and finance its growth in 2015 primarily with debt, but it is committed to keeping its key financial metrics within the parameters of the current rating category.

Although DBRS does not anticipate a rating change in the near to medium term, a material increase in the size of the portfolio, enhanced diversification, and/or decrease in financial leverage that results in an improvement in EBITDA interest coverage (including capitalized interest) to above 3.00 times could result in a positive rating action. On the other hand, weaker operating performance and/or higher financial leverage that leads to EBITDA interest coverage falling below 2.20 times 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.

The applicable methodologies are Rating Entities in the Real Estate Industry, DBRS Criteria: Guarantees and Other Forms of Explicit Support and Preferred Share and Hybrid Criteria for Corporate Issuers, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.