DBRS Confirms Granite REIT at BBB, Stable Trend

DBRS Limited (DBRS) has today confirmed the rating of Granite REIT Holdings Limited Partnership’s Senior Unsecured De¬bentures at BBB with a Stable trend. The rating is based on the credit risk profile of Granite Real Estate Investment Trust and Granite REIT Inc. (collectively, Granite or the Trust), as the Senior Unsecured Debentures are fully and uncon-ditionally guaranteed by the Trust. The rating confirmation ac¬knowledges the Trust’s recent diversification efforts, improving portfolio quality and lease extensions at key facilities in Austria. However, the rating continues to be constrained by the Trust’s significant tenant and geographic concentration and portfolio size relative to higher-rated investment-grade peers.

Granite continues to execute on its strategic plan in accordance with DBRS’s expectations. The major elements of Granite’s stra¬tegic plan announced in late 2011 include a conversion from a corporation to a REIT, revised distribution policy, enhanced diversification through portfolio growth and increasing leverage. Over the next few years, Granite is expected to ramp up its ac-quisition program. Granite’s management has stated its plan to acquire properties with a value of approximately $1 billion over the next three to four years. Granite is currently seek¬ing high-quality logistics and distribution industrial properties located primarily in its core European and U.S. markets with a cap rate range between 6.0% and 7.0%. DBRS believes the new acquisitions, coupled with developments coming on stream and selective property dispositions, should continue to enhance earn¬ings stability through a gradual improvement in asset quality and geographic and tenant diversification, thereby entrenching the Trust more firmly in the BBB rating category. In addition, recent lease extensions at core industrial properties in Austria have substantially reduced Granite’s re-leasing exposures, which should stabilize earnings going forward. DBRS also expects Granite will use a higher proportion of debt to fund portfo¬lio growth, eventually reaching 40% to 50% on a total debt-to-capital basis (including subordinated convertible debt and preferred equity) as indicated in its strategic plan.

DBRS’s rating incorporates Granite’s financial leverage target and the expectation for the Trust to operate with liquidity and financial metrics that are strong for the current rating category (i.e., EBITDA interest coverage of at least 3.0 times over the long term). DBRS notes that the current rating also incorporates the expectation for the Trust to not have more than 10% to 20% of secured debt-to-total debt upon achieving its targeted leverage levels.

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 methodologies are Rating Entities in the Real Estate Industry (October 2013) and DBRS Criteria: Guarantees and Other Forms of Explicit Support (February 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related
Research at the right of the screen or by contacting us at info@dbrs.com.

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