DBRS Confirms SmartREIT at BBB, Trend Stable

DBRS Limited (DBRS) has today confirmed the Senior Unsecured Debentures rating of Smart Real Estate Investment Trust (SmartREIT or the Trust) at BBB with a Stable trend. The confirmation acknowledges the increase in portfolio size and scale as well as an improved growth profile and enhanced internal real estate management and development capabilities following the acquisition of the SmartCentres platform in 2015 (the Transaction). The confirmation reflects an improvement in SmartREIT’s operating income and interest coverage, and also moderately higher debt levels following the Transaction. The rating continues to be constrained by the Trust’s considerable exposure to secondary markets, high geographic and tenant concentration as well as high secured debt levels.

DBRS expects that SmartREIT will continue to deliver steady growth in operating income in the near to medium term primarily from the Trust’s increasing focus on development and intensification projects and, to a lesser extent, acquisitions. Committed developments and earn-outs in 2016 and 2017 are expected to add approximately 180,000 square feet (sf) of leasable space (or 0.6%) to the portfolio and contribute approximately $5.2 million to annual net operating income (NOI). In addition, same-property NOI is expected to grow between 1% and 1.5% in 2016, mainly from contractual rent step-ups and higher average rental rates on lease renewals. DBRS believes that the Trust’s development and earn-outs pipeline, with an estimated $1.1 billion of future development costs, will be the main driver of growth over the next several years. Development and earn-out projects include the potential to add up to approximately 5.0 million sf (excluding lands under mezzanine financing and representing approximately 16.1% of gross leasable area as at Q1 2016), which will likely occur in phases and depend largely on tenants’ demand for new space. SmartREIT is expected to take advantage of the low interest rate environment and finance its near-term growth projects primarily with debt, but DBRS believes the Trust is committed to keeping its key financial metrics within the parameters of the current rating category.

RATING DRIVERS
A positive rating action could occur in the medium term should SmartREIT increase the size and scale of its portfolio and materially enhance geographic diversification while maintaining financial metrics commensurate at least with the current rating category. In addition, a positive rating action could also occur if SmartREIT conversely deleverages and/or increases EBITDA, resulting in an improvement in EBITDA interest coverage (including capitalized interest) to above 3.00 times on a sustained basis.

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), DBRS Criteria: Guarantees and Other Forms of Support (February 2016) 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.