DBRS Changes Trend on Cominar REIT to Negative from Stable

DBRS Limited (DBRS) has today confirmed the rating of Cominar Real Estate Investment Trust’s (Cominar or the Trust) Senior Unsecured Debentures at BBB (low) and has changed the trend to Negative from Stable.

The Negative trend change reflects Cominar’s slower-than-expected progress to reduce debt and bring leverage metrics back to levels that were achieved prior to the $1.527 billion acquisition of a property portfolio from Ivanhoé Cambridge (the Acquisition), a real estate subsidiary of the Caisse de dépôt et placement du Québec.

DBRS previously stated that the Acquisition would have a temporarily negative impact on Cominar’s leverage metrics and had expected the Trust’s debt to EBITDA and debt to capital to improve by the end of 2015 or early 2016. Since then, Cominar has shown slower-than-expected progress in reducing debt and improving these metrics in line with DBRS’s expectations. A rating downgrade would likely occur if there is a lack of improvement in these debt metrics over the next 12 months because of weakening operating performance and/or more aggressive financial management, such as failure to use proceeds from planned asset dispositions to reduce debt. The trend will be restored to stable if the Trust strengthens its financial profile by lowering debt levels below 53% on a debt-to-capital basis and/or improving its debt-to-EBITDA ratio to the low 9.0 times (x) range.

The current rating reflects Cominar’s large commercial real estate portfolio as well as its diversification by asset type and tenant; although, the rating is constrained by Cominar’s considerable geographic concentration in Québec as well as concentration of smaller retail and suburban properties.

The rating confirmation considers DBRS’s expectation that net rental income will continue to decline in 2016 because of weaker results in Cominar’s office segment and the anticipated loss of income from non-core property dispositions in secondary markets. Difficult leasing conditions for its office properties, particularly in Ottawa and Montréal, will likely contribute to same-property net operating income decline of 0.5% in 2016, partially offset by new leases signed for a portion of the former Target space and higher rental rates in other portfolio segments. DBRS, however, anticipates that Cominar will continue using tenant inducements and capital investments to address current vacancies and keep occupancy within the Trust’s historical range. These initiatives have recently improved occupancy to 92.6% as at Q2 2016 from 91.9% as at Q4 2015. DBRS does not expect any material property acquisitions to drive earnings growth for the remainder of 2016 as Cominar is expected to focus on property dispositions and development projects during the period. The Trust intends to sell approximately $149.0 million of properties over the next nine months, which is estimated to decrease net rental income by $10.4 million. DBRS projects EBITDA of $430.0 million to $440.0 million in 2017, which is well placed within the current rating category.

DBRS expects that cash flow from operations will remain insufficient to fund unit distributions, changes in working capital, maintenance capital expenditures and higher leasing costs. As such, DBRS expects Cominar to generate negative free cash flow in 2016. DBRS anticipates the Trust’s free cash flow deficit and debt reduction to be funded largely with property disposition proceeds. DBRS expects Cominar to de-lever its balance sheet and bring debt metrics back to levels that are in line with the current rating category. Over the next 12 months, if the Trust does not reduce debt and achieve a debt to capital below 53% and a debt-to-EBITDA ratio to the low 9.0x range, this would likely result in a downgrade.

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 (June 2016) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (January 2016), which can be found on our website under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.