DBRS Confirms Canadian Real Estate Investment Trust at BBB, Stable Trend

DBRS Limited (DBRS) confirmed the Senior Unsecured Debentures rating of Canadian Real Estate Investment Trust’s (CREIT or the Trust) at BBB with a Stable trend. The rating takes into consideration CREIT’s diversified portfolio by asset class, good quality retail properties, tenant diversification and conservative financial profile. However, the rating is constrained by the Trust’s size and scale, geographic concentration in Alberta, exposure to secondary and suburban markets, and high proportion of secured debt in the debt structure. The Stable trend reflects DBRS’s expectation for modest near-term EBITDA growth and solid financial metrics, notwithstanding some leasing risk in CREIT’s Alberta office portfolio in 2018.

CRIET had solid growth in EBITDA in the first nine months ended September 30, 2017, compared with the same prior year period driven by increases in net rental income from property acquisitions, completed development projects and high same-property growth in the retail and industrial asset classes. The retail segment had positive leasing activity in Ontario and British Columbia, and Alberta had higher rates on leasing. The industrial segment had higher occupancy across all geographies. Of note was the full occupancy at a Milton, Ontario, property throughout 2017. The office segment’s higher leasing activity in Québec and British Columbia offset higher vacancy in Alberta.

DBRS anticipates that CREIT’s EBITDA in the near term will modestly increase as a result of the completion of development properties and incremental contributions from acquisitions. In 2018, the retail, industrial and GTA office portfolios are expected to remain robust, while the Calgary office segment is expected to remain challenged, exacerbated by a large (47,000 square feet (sf)) Calgary office tenant vacancy in October 2018. With a greater emphasis on development versus acquisition in the foreseeable future, CREIT’s development program is well positioned to provide incremental EBITDA growth. Currently, the program comprises 26 projects accounting for approximately 2.4 million sf (owned interest), of which 15 are active and will represent 1.4 million sf when complete. Development is anticipated to be funded through recycling of capital and incremental debt.

Although improved in the last-12-months ended September 30, 2017, as a result of pay down of mortgage debt (from proceeds from a large loan), DBRS anticipates development funding will result in leverage and coverage ratios that are closer to its historical ranges. DBRS does not anticipate any material shifts in CREIT’s debt structure in the near term.

Further, DBRS does not anticipate any rating movement in the near to medium term as CREIT approaches a more pronounced development phase. DBRS would consider a positive rating action should CREIT significantly increase the size and scale of its portfolio while maintaining asset quality and increasing diversification. Alternatively, DBRS would consider a negative rating action should debt-to-EBITDA rise above 8.0 times or should the EBITDA-to-interest expense ratio fall below 2.30 times on a sustained basis.

Notes:
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 principal methodology is Rating Entities in the Real Estate Industry (April 2017).

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.

This rating is no longer endorsed by DBRS Ratings Limited for use in the European Union.