Press Release

DBRS Confirms Ratings of Artis REIT at BBB (low)/Pfd-3 (low), Stable Trends

Real Estate
December 21, 2018

DBRS Limited (DBRS) confirmed Artis Real Estate Investment Trust’s (Artis or the Trust) Senior Unsecured Debentures rating at BBB (low) and its Preferred Trust Units rating at Pfd-3 (low), both with Stable trends. The ratings continue to be supported by Artis’s mid-sized portfolio of diversified real estate assets. The ratings are constrained by the Trust’s high leverage (total debt-to-EBITDA of 9.4 times (x), last 12-month basis as at September 30, 2018), lack of scale in its markets, Calgary office exposure and significant proportion of properties in secondary and suburban markets.

The Stable trends take into consideration Artis’s recently announced Strategic Initiatives: on November 1, 2018, Artis announced new capital allocation initiatives intended to strengthen the Trust’s balance sheet and better position the Trust for long-term sustainable growth, as further described below. While DBRS acknowledges the potential for Artis to execute its Strategic Initiatives as expected, thus reducing debt materially in 2019 and 2020, DBRS is of the view that any such reduction in debt is largely temporary as Artis looks to fund its development pipeline and future acquisitions as well as unit buybacks under its Normal Course Issuer Bid (NCIB). Thus, the Stable trends reflect DBRS’s conservative view in terms of the timing and amounts of debt reduction associated with the Trust’s Strategic Initiatives, resulting in expectations for Artis’s total debt-to-EBITDA and EBITDA interest coverage (including capitalized interest) to be, respectively, 9.3x and 2.8x in 2019, and 9.4x and 2.8x in 2020. DBRS has also taken into consideration incremental improvements in the diversification business risk factor of Artis, further reinforced with the execution of the Strategic Initiatives.

The Strategic Initiatives include the following: (1) cut the distribution to common unit holders to $0.54 per unit from $1.08 per unit, effective for the November distribution, in order to improve the Trust’s free cash flow position (anticipated cash savings of $83 million, annualized); (2) dispose of $800 million to $1.0 billion in identified non-core assets, including a significant portion of Artis’s Calgary office portfolio, using a portion of the proceeds to pay down debt; (3) utilize a portion of net proceeds from the aforementioned disposition program to fund buybacks of common units trading at a significant discount to net asset value, as well as preferred units, under the Trust’s existing NCIB; and (4) utilize a portion of net proceeds from dispositions to fund the Trust’s development pipeline and acquisitions (anticipated spend of $150 million to $200 million per year through 2020). Artis anticipates that the execution of the Strategic Initiatives will take two to three years to complete.

A negative rating action could result if Artis deploys fewer sales proceeds toward debt reduction or EBITDA deteriorates more than anticipated by DBRS such that total debt-to-EBITDA deteriorates above 9.8x or if EBITDA interest coverage (including capitalized interest) deteriorates below 2.70x on a sustained basis, all else equal. Absent a material reduction in leverage, a positive rating action is unlikely in the near to medium term.

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 (November 2018), which can be found on dbrs.com under Methodologies & Criteria.

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.

Ratings

Artis Real Estate Investment Trust
  • Date Issued:Dec 21, 2018
  • Rating Action:Confirmed
  • Ratings:BBB (low)
  • Trend:Stb
  • Rating Recovery:
  • Issued:CA
  • Date Issued:Dec 21, 2018
  • Rating Action:Confirmed
  • Ratings:Pfd-3 (low)
  • Trend:Stb
  • Rating Recovery:
  • Issued:CA
  • US = Lead Analyst based in USA
  • CA = Lead Analyst based in Canada
  • EU = Lead Analyst based in EU
  • UK = Lead Analyst based in UK
  • E = EU endorsed
  • U = UK endorsed
  • Unsolicited Participating With Access
  • Unsolicited Participating Without Access
  • Unsolicited Non-participating

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