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 reflects DBRS’s expectation for Crombie to maintain key financial metrics at levels commensurate with the current rating category and to continue to focus on improving portfolio quality through property dispositions and a sizable development program. The confirmation also considers DBRS’s expectation that the long-term nature of Crombie’s leases, combined with built-in contractual rental rate increases in the majority of its leases, should provide stability and predictability to cash flow and good protection from unfavourable changes in market conditions. DBRS expects Crombie to deliver net rental income and EBITDA growth in low- to mid-single digits, mainly due to contributions from property investments in 2015 and 2016 and modest same-portfolio NOI growth. DBRS expects these results will be partially offset by the loss of income from the recently announced property dispositions.

Crombie’s management expects to acquire, on average, $100 million of properties from its strategic Empire/Sobeys relationship annually and will continue to cull its portfolio of noncore properties and use proceeds to fund growth initiatives. Crombie is embarking on a significant development program with an estimated value of $1 billion to $2 billion, which DBRS believes will be the main growth driver over the next several years. The current rating incorporates DBRS’s expectation that Crombie keeps debt levels close to 50% on a debt-to-gross book value assets ratio (fair value basis) and a EBITDA interest coverage ratio above 2.40 times (including capitalized interest). DBRS acknowledges that EBITDA interest coverage (including capitalized interest) could fall below 2.40 times, but only on a temporary basis, as the Trust is likely to incur interest costs to fund its development projects prior to receiving NOI contributions upon their completion.

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 (May 2015), Preferred Share and Hybrid Criteria for Corporate Issuer (January 2016) and DBRS Criteria: Guarantees and Other Forms of Explicit Support (February 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.