DBRS Confirms SmartCentres REIT’s Senior Unsecured Debentures at BBB with a Stable Trend

DBRS Limited (DBRS) confirmed the Senior Unsecured Debentures rating of SmartCentres Real Estate Investment Trust (SmartCentres or the Trust) at BBB with a Stable trend. The confirmation reflects SmartCentres continued growth in its portfolio of value-focused shopping centres, including the acquisition of 12 properties (2.2 million square feet) from OneREIT in the fourth quarter of 2017 (the OneREIT Transaction) and an active development pipeline. The rating is supported by SmartCentres’ roster of high-quality tenants, including Walmart Inc. (Walmart, rated AA with a Stable trend by DBRS) and strong market position in the value-focused retail segment nationally. The rating is constrained by concentration risks including asset class, geography and tenant exposure, high leverage (total debt-to-EBITDA ratio on a last-12-months (LTM) basis of 8.9 times (x) as at June 30, 2018) and development execution risks.

The Stable trend takes into consideration DBRS’s expectations of continued growth in the Trust’s portfolio in the near to medium term, both in terms of EBITDA (year-over-year 2018 Expected (E) of 5.0% & 2019E of 3.3%) and gross leasable area, driven by acquisitions (primarily the full-year impact of the OneREIT Transaction), developments and earnouts. In the near to medium term, DBRS expects capital expenditures related to acquisitions, developments and earnouts to be funded primarily by transfers of development lands into joint-venture partnerships (dispositions), equity and incremental debt. DBRS expects the pace of growth in EBITDA to exceed that of incremental debt issuance, thereby leading to lower leverage levels from the current 8.9x (LTM basis as at June 30, 2018) and resulting in total debt-to-EBITDA of 8.7x for 2019E.

Although unlikely in the near to medium term, a positive rating action could occur as SmartCentres continues to grow and diversify its portfolio and bolster its market position through successful development completions and deleverages and/or increases EBITDA such that total debt-to-EBITDA improves to below 7.3x and EBITDA interest coverage (including capitalized interest) remains above 3.00x on a sustained basis. Conversely, a negative rating action could occur should SmartCentres’ key credit metrics develop a deteriorating trend from expected levels (total debt-to-EBITDA and EBITDA interest coverage), all else equal.

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

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