DBRS Confirms First Capital Realty Inc. at BBB (high) with a Stable Trend

DBRS Limited (DBRS) confirmed the BBB (high) rating of the Senior Unsecured Debentures issued by First Capital Realty Inc. (First Capital or the Company). The trend is Stable.

The rating continues to be supported by First Capital’s retail portfolio of unenclosed supermarket- and drugstore-anchored shopping centres, strong tenant base, development capabilities in urban markets and property diversification. The rating is limited by First Capital’s high leverage ratio, relatively small portfolio and geographic and tenant concentration. Additionally, the rating incorporates the DBRS expectation that First Capital will continue to maintain a relatively low level of secured debt as a proportion of total debt (i.e., less than 40%).

The Stable outlook reflects DBRS’s expectation that First Capital will strengthen its debt-to-EBITDA leverage ratio in the near term while maintaining earnings growth. Over the course of 2017, the debt-to-EBITDA leverage ratio remained elevated in the low 10 times (x) range, which is higher than First Capital’s historical range of 9.2x to 9.5x from 2013 to 2015. (DBRS notes that beginning at the start of First Capital’s F2016, convertible debentures, $54.6 million outstanding as at Q3 2017, received 0% equity treatment in calculating the DBRS-adjusted debt. Prior to First Capital’s F2016, DBRS treated First Capital’s convertible debentures as 50% equity and 50% debt.) The expectation is that the deterioration will reverse itself in 2018, and settle in the 9.5x to 10x range as a result of a full year of net-operating income contributions resulting from completed redevelopments and developments in 2017, as well as proceeds from property dispositions closing in H1 2018 that will be used to reduce debt. The aforementioned redevelopments and developments, coupled with expiring leases at below-market rents, should factor in to earnings growth going forward. The Company’s focus on supermarket- and drugstore-anchored retail should provide some resilience against its exposures to the recovering Calgary and Edmonton economies.

Over the next few years, DBRS anticipates that redevelopment and development (including intensification) will be the primary sources of growth for First Capital, relative to acquisitions, given the current pricing dynamics. Acquisitions are likely to be strategic, such as the new retail space (85,000 square feet) at the southeast corner of Yonge Street and Bloor Street in Toronto, or near existing properties, such as 50% of 101 Yorkville Avenue, a property that is across from several First Capital properties. Such investments are likely to be funded with capital recycling, free cash flow and incremental debt (albeit to a lesser extent). As such, DBRS anticipates the debt-to-EBITDA ratio will improve on a longer-term basis from its 10.1x for the nine months ended Q3 2017.

A negative rating action could result from weaker operating and earnings performance or higher financial leverage, such that the debt-to-EBITDA ratio remains above 10.0x or EBITDA-interest coverage ratio decreases below 2.30x on a sustained basis, all else equal. A positive rating action, albeit less likely, could result if there is a substantial increase in portfolio size and decrease in financial leverage, resulting in a sustained material improvement in the debt-to-EBITDA ratio and EBITDA-interest coverage ratio.

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

The principal methodologies are Rating Entities in the Real Estate Industry (April 2017), DBRS Criteria: Guarantees and Other Forms of Support (January 2018) and DBRS Criteria: Preferred Share and Hybrid Securities 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.

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.

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