DBRS Comments on Crombie REIT following the Trend Change on Sobeys’ Ratings

DBRS Limited (DBRS) today comments on the credit implications for Crombie Real Estate Investment Trust’s (Crombie or the Trust) Senior Unsecured Debentures rating following the recent change in DBRS’s trend on Sobeys Inc.’s (Sobeys) ratings to Negative from Stable. Please see the DBRS press release on Sobeys dated September 15, 2016, for further details.

In DBRS’s view, the Negative trend on Sobeys’ ratings modestly weakens Crombie’s tenant-quality profile as Sobeys represents 53.6% of the Trust’s annual minimum rent as at Q2 2016. Despite this weakening in the Trust’s tenant-quality profile, there are no immediate implications for Crombie’s credit rating. While the common ownership and strong connection between Sobeys’ and Crombie’s operations closely align their interests, Crombie’s rating does not necessarily have to move in tandem with Sobeys’ ratings; however, if there is additional significant deterioration to Sobeys’ credit risk profile and/or store closures such that EBITDA interest coverage declines to below 2.20 times (x), a negative rating action would likely occur.

Crombie’s ratings continue to be supported by its mid-sized portfolio of grocery- and drugstore-anchored retail properties, the portfolio’s geographic diversification and the long-term nature of the Trust’s leases.

Crombie’s EBITDA remained relatively flat at $118.3 million for year-to-date (YTD) Q2 2016 versus $117.7 million for the same period one year earlier, resulting in EBITDA interest coverage of 2.52x versus 2.56x one year earlier. Debt-to-EBITDA increased to 10.1x for YTD Q2 2016 from 9.0x YTD Q2 2015, but is expected to improve to 9.2x in 2017, albeit still not consistent with the parameters of the current rating category. This is mainly because of the $193 million in incremental debt for acquisition financing which was recorded at the end of Q2 2016 while expected incremental income of $26.5 million from the acquired properties has yet to be recognized.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Entities in the Real Estate Industry (June 2016), Preferred Share and Hybrid Criteria for Corporate Issuers (January 2016) and Guarantees and Other Forms of Explicit Support (February 2016), which can be found on our website under Methodologies.

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