DBRS Confirms Canadian Real Estate Investment Trust at BBB, Stable Trend

DBRS Limited (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 confirmation acknowledges CREIT’s moderate exposure to Alberta’s oil and gas-based markets and also considers the Trust’s continued growth in operating income while maintaining solid financial metrics for the current rating category. The rating continues to be supported by 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 as well as its high proportion of secured debt.

The Stable rating outlook reflects DBRS’s expectation for EBITDA growth to moderate in 2015 as full-year income contributions from recent property acquisitions and completed development projects are partially offset by the anticipated departure of Harvest Operations Corp. (a 137,000 square foot (sf) tenant at CREIT’s 50% owned Calgary Place, accounting for approximately $3.3 million annual gross rental revenue) in Q1 2015. In addition, the increasingly challenging office leasing environment in Alberta, a result of the steep decline in oil prices, will likely put pressure on market rental rates; however, CREIT’s diversified portfolio, high-quality tenant profile and reasonably balanced lease maturity profile should provide cash flow stability and limit the Trust’s exposure to changes in market rents. While the pace of acquisitions is expected to slow in the near term because of a competitive environment for high-quality properties, DBRS expects CREIT to instead place emphasis on its development program. CREIT has approximately 3.2 million sf (owned interest) of properties in its development program, primarily with strategic and experienced development partners, which reduces 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 that these developments could add approximately $47 million to net operating income 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.