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

DBRS Limited (DBRS) has today confirmed the rating of Artis Real Estate Investment Trust’s (Artis or the Trust) Senior Unsecured Debentures at BBB (low) and its Preferred Trust Units at Pfd-3 (low), both with Stable trends.

The rating confirmation takes into consideration DBRS’s expectation of continued weaker results from the Trust’s Alberta properties, particularly in the office segment (accounts for 15% of total net operating income (NOI)), over the next few years and the Trust’s plan to gradually increase its exposure to better-performing U.S.-based markets by way of non-core property dispositions and new investments. The confirmation also reflects DBRS’s expectation 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 in light of declining asset values from its Alberta portfolio.

EBITDA increased by 8.1% to $328.8 million for the year ended December 31, 2015, compared with a year earlier, mainly as a result of recent acquisitions, completed developments and higher same property NOI from the industrial, retail segments and U.S. portfolio. Challenging conditions in Artis’s core Alberta market, however, have caused a decline in the Trust’s total asset value (a fair value loss of $371.9 million during 2015) and partially offset the aforementioned earnings growth. Despite higher debt ratios over the last year, Artis continues to maintain a conservative financial profile with solid coverage ratios, which have benefitted from the aforementioned earnings growth and interest expense savings on debt refinancing activity.

The stable rating outlook incorporates DBRS’s expectations that Artis will experience weaker results from its Alberta portfolio more than offset by positive results from the U.S. portfolio and segments outside of Alberta over the next few years. Current in-place rental rates for leases expiring in the Calgary office market over the next two years are approximately 33% above market rates and will likely translate into accelerating declines in same property NOI for the Alberta portfolio (DBRS estimates declines of -5% to -6% in 2016). However, uncommitted Alberta lease maturities are manageable and account for an aggregate 11.1% of the Trust’s gross leasable area before the end of 2019. In addition, only approximately 1.0 million square feet of Calgary office space is scheduled to expire during the aforementioned period. As such, DBRS also believes Artis will continue to recycle capital by selling non-core properties and investing into high quality ones with a preference in the United States.

DBRS notes, however, that weaker-than-expected operating and earnings performance and/or higher financial leverage that leads to EBITDA interest coverage falling below 2.30 times on a sustained basis could result in a negative rating action. Although unlikely at this time, 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 and diversification.

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 (May 2015), and Preferred Share and Hybrid Criteria for Corporate Issuers (January 2016), 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.