DBRS Confirms Ratings on Choice Properties Real Estate Investment Trust and Choice Properties Limited Partnership at BBB, Stable Trend, Following Announced Ownership Change

DBRS Limited (DBRS) confirmed the Senior Unsecured Debenture (guaranteed by CPLP) rating of Choice Properties Real Estate Investment Trust (CPREIT) and the Senior Unsecured Debenture rating of Choice Properties Limited Partnership (CPLP; collectively, Choice Properties) at BBB. All trends are Stable. Since CPLP guarantees the debentures of CPREIT, the two ratings are harmonized. DBRS also discontinued and withdrew CPLP’s Issuer Rating.

George Weston Limited (GWL) announced a reorganization under which Loblaw will spin out its 61.6% interest in CPREIT. Under the spin-out, Loblaw common shareholders (excluding GWL) will receive GWL common shares for every Loblaw share and GWL will receive Loblaw’s 61.6% interest in Choice Properties. GWL will have, on a pro-forma basis, a 65.4% effective ownership interest in Choice Properties. The announced transaction transfers ownership of Choice Properties to GWL which, as a long-term strategic owner, is supportive of Choice Properties’ diversified growth vision.

DBRS believes the level of implicit support from GWL to CPLP is strong based on its “DBRS Criteria: Guarantees and Other Forms of Support,” but no rating uplift to CPLP’s Senior Unsecured Debenture rating is warranted since GWL’s BBB rating is not materially higher than CPLP’s rating. Note that Loblaw, which no longer has an ownership position in CPLP, ceases to be a source of implicit support for CPLP.

As such, DBRS has assessed Choice Properties’ credit risk profile on a stand-alone basis pursuant to DBRS’s “Rating Entities in the Real Estate Industry” methodology. Primary attributes of Choice Properties include:

(1) Adequate asset quality – long-term leases provide cash flow stability; lease terms averaging 8.0 years (9.8 years for Loblaw) contribute to stability of cash flows with reasonable ability to withstand market weakness; and tenant concentration with Loblaw representing over 56% of gross revenues.

(2) Average market position with strong leadership in at least one market; somewhat strong ability to attract quality tenants; and average bargaining power with tenants, contractors and zoning regulators.

(3) Above-average portfolio size with 66.8 million square feet of gross leasable area with EBITDA of $635.7 million for the 12 months ended June 30, 2018.

(4) Average portfolio diversity with well-located portfolio of retail (69.5%), industrial (24.8%), office (5.4%) and residential (0.2%) properties as well as overall portfolio occupancy exceeding 98%.

(5) Strong lease maturity profile with average credit quality tenants and low annual lease maturities ranging from 4.7% to 10.3% over the next five years.

(6) Moderately aggressive financial profile as debt-to-EBITDA and EBITDA interest coverage is forecasted to be 9.2 times (x) and 2.9x, respectively, at FY2018 with expected improvement to 8.4x and 3.2x, respectively, by the end of 2019 as well as manageable annual debt maturities over the next five years ranging from 7.3% to 12.4% of total debt outstanding. DBRS anticipates that capital expenditures for incremental acquisitions and development will be funded primarily by debt.

(7) Growth is partially dependent on Loblaw as Choice Properties continues to benefit from a strategic alliance agreement with Loblaw that provides Choice Properties with acquisition and development opportunities.

(8) Leasing consent from Loblaw, which has the right of first offer to lease suitable supermarket space in the Choice Properties portfolio whenever any becomes available. On newly acquired properties, Choice Properties is not allowed to enter leases or subleases with another supermarket tenant without Loblaw’s consent (with some exceptions).

DBRS notes that CPREIT’s Senior Unsecured Debenture rating is directly constrained by Loblaw’s rating, given the presence of a cross-default provision in the credit facility. This default provision is not a limiting factor to CPREIT’s current rating as Loblaw is rated BBB. In addition, since Loblaw is CPLP’s largest tenant, CPLP’s rating would also be pressured if Loblaw’s rating was downgraded or a cross default was triggered between Loblaw and CPREIT.

DBRS’s methodology assumes the presence of significant amounts of prior-ranking debt in the capital structure. While DBRS understands that Choice Properties intends to maintain a secured debt-to-total debt ratio comfortably below 40% on a sustained basis, DBRS believes that an unencumbered assets-to-unsecured debt coverage of 1.6x is relatively low, given the quality of the asset portfolio and other qualitative factors. Thus, in DBRS’s opinion, a rating uplift for a low level of secured debt is not warranted at this time.

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

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

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