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

DBRS Limited (DBRS) has today confirmed the rating of Crombie Real Estate Investment Trust’s (Crombie or the Trust) Senior Unsecured Debentures at BBB (low) with a Stable trend. The confirmation acknowledges the successful integration of the 70 Western Canadian retail properties acquired from Sobeys Inc. (Sobeys; rated BBB (low) with a Stable trend) for an aggregate purchase price of just over $1 billion in Q4 2013 (including transaction costs). The confirmation also reflects a modest improvement in debt metrics and the Trust’s continued focus on improving portfolio quality. The rating continues to be based on Crombie’s mid-sized portfolio of stable retail properties, long-term leases with favourable terms, geographic diversification and its strategic relationship with Sobeys and Empire Company Limited (Empire). The rating is limited by Crombie’s tenant concentration, significant exposure to small or secondary/tertiary markets, leasing challenges at its more volatile enclosed shopping centre segment and a high proportion of secured debt.

The stable outlook reflects DBRS’s expectation that the Trust will continue to pursue portfolio growth by focusing on acquiring new grocery-anchored plazas and free-standing stores from Empire, Sobeys and third-party vendors in a financially balanced manner. Crombie’s management expects to acquire, on average, $100 million of properties from its strategic Empire/Sobeys relationship annually. Crombie is also expected to focus on mixed-use redevelopment projects over the next few years, which should provide an additional source of income. In terms of financial profile, DBRS expects Crombie’s debt-to-gross book value assets ratio (fair value) to return to 50%, primarily through equity issuance and/or convertible debenture conversions. Correspondingly, DBRS expects coverage ratios to remain above 2.40 times, a level that is commensurate with the Trust’s credit risk profile. DBRS notes that while the common ownership and strong connection between Sobeys and the Trust’s operations closely align their interests, the credit risk profiles of the entities do not necessarily have to be the same or move in tandem with each other. This view is supported by the strength of Crombie’s real estate portfolio regardless of its tenant profile. In addition, Empire’s minority ownership in Crombie limits its influence on the Trust’s financial policy. Therefore, a rating change at either Sobeys or Empire would not necessarily result in a rating change for Crombie. A negative rating action could result from weaker operating and earnings performance and/ or higher financial leverage, such that EBITDA interest coverage falls below 2.20 times, and/or a significant deterioration in Sobeys’ credit risk profile. On the other hand, a positive rating action would likely be the result of a material increase in portfolio size, improved tenant diversification and/or a decrease in financial leverage that results in a sustained improvement in EBITDA interest coverage above 3.00 times.

Note:
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 (October 2013), Preferred Share and Hybrid Criteria for Corporate Issuers (January 2015) and DBRS Criteria: Guarantees and Other Forms of Explicit Support (February 2015), which can be found on our website under Methodologies.

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