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 Debentures at BBB with a Stable trend. The rating is based on the credit risk profile of Granite Real Estate Investment Trust (Granite REIT) and Granite REIT Inc. (collectively, Granite or the Trust), as the Senior Unsecured Debentures are fully and unconditionally guaranteed by the Trust. The confirmation acknowledges the recent conclusion of Granite’s review of strategic alternatives and reflects the Trust’s continued focus on enhancing portfolio quality and diversification through growth. The confirmation also takes into consideration DBRS’s expectation of higher debt levels as the Trust pursues its growth opportunities. The rating continues to be constrained by the Trust’s significant tenant and geographic concentration and portfolio size relative to Granite’s higher-rated, investment-grade peers.

DBRS expects earnings to modestly increase primarily because of the lease-up of completed development projects and contractual rental rate increases in 2016. Granite has a significant number of leases maturing between 2017 and 2019. Five special-purpose properties tenanted by Magna International Inc. (Magna) and its operating subsidiaries, four of which are located in Canada and one in Austria, represent the largest number of maturing leases and account for approximately $35 million in annualized lease payments. In DBRS’s view, these properties are core to Magna’s operations, which is supported by Magna’s having made significant capital investments in these properties over the past several years. As such, DBRS expects Magna to renew these leases.

Over the next few years and as the leases for the five special purpose properties are settled, Granite is expected to ramp up its acquisition program. Granite’s management has stated its plan to acquire and develop properties with a value of approximately $1 billion over the next three to four years. Granite is currently seeking 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 earnings stability through a gradual improvement in asset quality and geographic and tenant diversification, thereby entrenching the Trust more firmly in the BBB rating category.

DBRS expects Granite to fund its investments and potential unit repurchases of up to an aggregate of approximately 3.64 million of issued and outstanding units with proceeds from asset dispositions and incremental debt in 2016. As a result, DBRS expects Granite’s debt-to-capital ratio to eventually reach 40% to 50% (including subordinated convertible debt and preferred equity).

RATING DRIVERS
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 not to have more than 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.

The applicable methodologies are Rating Entities in the Real Estate Industry (May 2015) 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.