DBRS Confirms Artis Real Estate Investment Trust at BBB (low)/Pfd-3 (low), Stable Trends

DBRS Limited (DBRS) confirmed the rating of Artis Real Estate Investment Trust’s (Artis or the Trust) Senior Unsecured Debentures at BBB (low) and its Preferred Trust Units at Pfd-3 (low), both with Stable trends. The ratings take into consideration the Trust’s asset class diversification, mid-sized portfolio (last 12 months ending September 30, 2017, (LTM) EBITDA of $314.1 million) with several quality assets and diverse tenant base. The rating is restrained by Artis’s limited scale within each class of real estate, concentration of properties in suburban/secondary markets, constrained financial profile (total debt-to-EBITDA of 8.8x, LTM) and an office leasing environment in Calgary, Alberta that remains challenging.

The Stable rating outlook reflects DBRS’s expectation that in the near to medium term Artis will maintain its current size, particularly as measured by EBITDA, maintain its financial profile as measured by its key financial metrics (EBITDA interest coverage and total debt-to-EBITDA) and substantially maintain its current exposure to the Calgary office market, while incrementally renewing and upgrading its portfolio and progressing its development and intensification pipeline.

During the first nine months of 2017, or year-to-date (YTD), the Trust’s EBITDA was $232.7 million, a reduction of $17.1 million or 6.8% over the same period a year ago, largely driven by dispositions (13 properties, 1.3 million square feet or 5.4% gross leasable area), negative impact of foreign exchange from the U.S. portfolio and a continued challenging office leasing environment in Calgary (10.7% of net operating income). As at September 30, 2017, occupancy was 78.5% in Artis’s Calgary office portfolio, down from 85.4% a year ago, as the Calgary office leasing environment remains challenging. Balance sheet debt was reduced by $224.9 million YTD as Artis utilized property dispositions to reduce debt resulting in a decreased total debt-to-EBITDA ratio of 8.8 times (x) (LTM).

While unlikely in the near to medium term, DBRS would consider a positive rating action should Artis significantly increase the size and scale of its portfolio as measured by EBITDA while maintaining its existing portfolio strategy and incurring only modest incremental debt. Alternatively, DBRS would consider a negative action should the EBITDA interest coverage ratio fall to 2.30x or if the total debt-to-EBITDA ratio rise to 9.4x on a sustained basis.

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

The principal methodologies are Rating Entities in the Real Estate Industry (April 2017) and DBRS Criteria: Preferred Share and Hybrid Criteria for Corporate Issuers (December 2017), which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

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

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