DBRS Confirms CT REIT’s Senior Unsecured Debentures at BBB (high) with a Stable Trend

DBRS Limited (DBRS) confirmed the Issuer Rating of CT Real Estate Investment Trust Limited Partnership (CT REIT LP) and the Senior Unsecured Debentures rating of CT Real Estate Investment Trust (the Trust, and collectively with CT REIT LP, CT REIT) at BBB (high), both with Stable trends. The ratings take into consideration DBRS’s view that the credit risk profile and ratings of CT REIT are aligned to that of Canadian Tire Corporation Limited (CTC; rated BBB (high) with a Stable Trend by DBRS; last confirmed May 10, 2018) largely because CTC effectively controls CT REIT through its majority ownership and is the dominant tenant, among other reasons further elaborated below. Any adverse change in the rating of CTC would likely have a negative impact on the rating of CT REIT.

While CTC does not provide explicit support to CT REIT, DBRS assesses the level of implicit support by CTC to CT REIT to be strong based on the following considerations of essentiality, contractual obligations, ownership, reputation and integration: (1) CT REIT is essential to the operation of CTC. CT REIT is CTC’s dominant landlord for the foreseeable future, representing a substantial amount of CTC’s annualized occupancy expense and a sizable amount of CTC’s retail real estate square footage (sf). (2) There are substantial contractual arrangements between CT REIT and CTC, including CT REIT’s right of first offer on all CTC properties, CTC’s right of first offer on all properties sold by CT REIT, and CTC’s right of first refusal on change of control of CT REIT if a competitor acquires more than 50% of CT REIT. There are also long-term lease agreements, services and property management agreements between CTC and CT REIT. There is also a provision in the credit facility that cross-defaults to CTC under certain conditions. (3) CTC’s effective ownership of CT REIT was approximately 76.3% of CT REIT’s equity as at November 28, 2018, following the closing of a $265 million secondary and treasury offering of CT REIT units. (4) The reputational risk implications of CT REIT to CTC are high given its strong interconnections. (5) Integration between CTC and CT REIT is strong through strategies, operations and oversight. CTC has the right to nominate three trustees out of the total seven trustees who serve on CT REIT’s Board. CTC consent is required for material acquisitions, dispositions, developments, financing and refinancing, and replacement of the CEO.

CT Real Estate Investment Trust’s Senior Unsecured Debentures rating reflects (1) a low level of prior-ranking debt (the sum of secured debt (e.g., mortgages) and the limit on the unsecured credit facility, including any uncommitted accordion provision, if applicable) in the CT REIT debt structure (i.e., <40% of total debt); (2) DBRS’s expectation that no additional unsecured debt will be issued at CT REIT LP (excluding its existing credit facility) going forward; and (3) DBRS’s expectation that future unsecured debentures will only be issued at the Trust.

CTC’s stated intention is to remain majority unitholder of CT REIT over the long term. Should CTC’s ownership or control in CT REIT diminish materially over time or if CT REIT no longer represents a material proportion of CTC’s portfolio, by size or by rent paid, CT REIT’s credit risk profile could be assessed on a stand-alone basis using the DBRS methodology “Rating Entities in the Real Estate Industry.” DBRS believes that CT REIT, on a stand-alone basis, would be characteristic of an investment-grade credit at the lower end of the range. In the event that the credit risk profile of CT REIT was assessed on a stand-alone basis, DBRS notes that CT REIT LP’s Issuer Rating and the Trust’s Senior Unsecured Debenture rating would be constrained by CTC’s rating.

DBRS notes that the above press release was amended on March 22, 2019, to add a note about the National Instrument 25-101 Designated Rating Organizations. 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), Rating Companies in the Merchandising Industry (August 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.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.