DBRS Changes Trend on Crombie REIT to Negative from Stable

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

The change in trend reflects the additional significant deterioration to Sobeys Inc.’s (Sobeys or the Company) credit risk profile. DBRS downgraded Sobeys’ ratings to BB (high) while it maintained the Company’s trends at Negative (see DBRS press release dated March 15, 2017). This action is consistent with DBRS’s view as expressed on the DBRS press release dated September 15, 2016.

If Sobeys’ Negative trend returns to Stable, DBRS may consider revising Crombie’s trend back to Stable. Should Sobeys’ ratings be downgraded to BB, DBRS’s business risk assessment would be negatively affected, which would likely lead to a downgrade of Crombie’s Senior Unsecured Debentures rating to BB (high). However, any additional deterioration in Sobeys’ credit risk profile would not necessarily lead to further negative rating actions for Crombie. DBRS’s surveillance of Crombie’s credit risk profile will continue to include an assessment of Sobeys, including its business strategy and supply and demand dynamics of Canadian retail space. In addition, the Trust’s rating could benefit from relatively good recovery prospects because of its large unencumbered asset base, approximately $1 billion as at YE2016, relative to $473.5 million of senior unsecured debt outstanding (pro forma YE2016).

Crombie’s rating is 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 increased moderately to $252.5 million for year-end 2016 versus $236.6 million a year earlier, resulting in EBITDA interest coverage of 2.66 times (x) versus 2.55x one year earlier. Debt-to-EBITDA increased to 9.5x for YE2016 from 9.2x a year earlier, but is expected to improve closer to 9.0x in 2017 as the Trust recognizes full-year earnings contributions from recent investments.

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 (February 2017), DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (December 2016) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017), which can be found on our website under Methodologies.