DBRS Confirms Cominar Real Estate Investment Trust’s Senior Unsecured Debentures at BB (high) with a Stable Trend

DBRS Limited (DBRS) confirmed Cominar Real Estate Investment Trust’s (Cominar or the Trust) Senior Unsecured Debentures rating of BB (high) with a Stable trend. The confirmation takes into consideration Cominar’s evolving business risk profile with significant geographic concentration in Québec and its exposure to more vulnerable secondary suburban markets, as well as the expectation of deteriorating leverage metrics in the near to medium term from already elevated levels if there is no sale of assets. Cominar has indicated that it is actually in the process of selling some assets and the sale proceeds will be used to reduce debt. The rating is supported by the underlying stability of cash flow derived from its large real estate portfolio, strong market position in the Québec City and Montréal commercial real estate markets and reasonable asset quality.

The Trust has achieved progress toward executing its Cominar 2.0 strategy of refocusing on its core markets of Québec City, Montréal and Ottawa, as demonstrated by the following: (1) During H1 2018, the Trust disposed of 95 non-core properties for proceeds of $1.14 billion. (2) Cominar has added three new experienced members to the Board of Trustees to address the evolving real estate landscape. (3) The Trust will be winding down the construction services relationship with Groupe Dallaire due to their diverging strategies, as the Trust remains focused on the ownership, management and development of commercial properties in its core markets. However, the Trust and Groupe Dallaire will continue to be joint venture partners on three existing properties: Complexe Jules-Dallaire (75% Cominar share), Bouvier-Bertrand (50% Cominar share) and Marais (75% Cominar share).

With the sale proceeds used to repay debt, Cominar’s total debt-to-EBITDA ratio improved to 9.4 times (last 12 months ended June 30, 2018), which is consistent with DBRS’s expectation in its August 28, 2017, press release, but nevertheless remains elevated. For the six months ended June 30, 2018, Cominar’s same-property net operating income (NOI) growth was 0.5% overall, with the office segment reporting 3.8% growth, the industrial/mixed-use segment reporting 5.3% growth and retail reporting a 5.6% decline, although if space formerly occupied by Sears is excluded, overall same-property growth would have been 1.9% instead of 0.5% for the six months ended June 30, 2018. Lease maturities were renewed at average rents 0.4% higher than expiring rents. Over the next six quarters, Cominar has indicated that leases for 1.8 million square feet of space are expected to generate NOI of $25.4 million on an annualized basis. DBRS expects to see the gap between in-place and contractually committed lease occupancy rates to narrow as a result.

While not expected currently, a negative rating action could result if a sustained decline in operating performance leads to deteriorating trends in financial risk metrics beyond current expectations. A positive rating action could occur with a sustained improvement in the Trust’s operating performance, leading to lower vacancies and improvements in operating cash flow and free cash flow and resulting in leverage, as measured by total debt-to-EBITDA, of less than 9.0x, on a sustained basis, accompanied by improvement in EBITDA interest coverage.

DBRS notes that the above press release was amended on February 5, 2019, to add a note that directs the reader to dbrs.com for more information. The amendment was minor and would not impact the understanding of the reader.

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: 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.

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