DBRS Confirms CREIT 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 above average exposure to Alberta’s oil- and gas-based markets and reflects DBRS’s expectation for modest near-term growth and solid financial metrics. The rating continues to be supported by CREIT’s conservative financial profile, good quality retail properties and well-diversified portfolio. The rating, however, continues to be constrained primarily by the Trust’s size and scale, high proportion of secured debt and exposure to secondary and suburban markets.

CREIT has recently made significant leasing progress by addressing a majority of its 2016 maturities. Of the 2.3 million square feet (sf) of contractual lease maturities in 2016, the equivalent of 74% of expiries has been secured or is in advanced negotiations of being leased. The stable rating outlook incorporates DBRS’s expectation for flat same-property net operating income (NOI) growth in 2016. DBRS expects CREIT’s office properties, particularly those located in the Alberta markets (4.4% of total GLA), to continue to experience rent and occupancy pressure during the year.

The Trust’s retail portfolio and Ontario industrial properties are, however, expected to achieve modest rental rate growth, which should offset declines in the office portfolio. DBRS still expects EBITDA growth of 1.7%, reaching $310 million, because of incremental income contributions from recent property acquisitions and completed development projects. CREIT’s diversified portfolio, high-quality tenant profile and reasonably balanced lease maturity profile should, however, continue to provide underlying support to cash flow stability and limit the Trust’s exposure to unfavourable changes in market rents.

CREIT is expected to continue to place emphasis on its higher yielding development program. CREIT has approximately 2.9 million sf (owned interest) of properties in its development program, primarily with strategic and experienced development partners, reducing 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 these developments could add approximately $35 million to $40 million to NOI over the next three to five 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, the current rating category could tolerate a moderate increase in leverage.

DBRS does not anticipate any rating movement in the near to medium term. DBRS would consider a positive rating action should CREIT significantly increase the size and scale of its portfolio while maintaining or improving asset quality and diversification and/or lowering the proportion of secured debt. Alternatively, DBRS would consider a negative rating action should the weak conditions in Alberta persist over the next few years and cause tenant departures and lower rents, resulting in EBITDA coverage ratio falling below 2.30 times.

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 methodology is Rating Entities in the Real Estate Industry (May 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link or by contacting us at info@dbrs.com.