DBRS Confirms Rating of Granite REIT Holdings Limited Partnership’s Senior Unsecured Debentures at BBB with a Stable Trend

DBRS Limited (DBRS) confirmed the rating of Granite REIT Holdings Limited Partnership’s (GRHLP) Senior Unsecured Debentures at BBB with a Stable trend. DBRS notes that the rating is based on the credit risk profile of the combined entity, including GRHLP and its subsidiaries, as well as Granite Real Estate Investment Trust (Granite REIT) and Granite REIT Inc. (collectively, Granite or the Trust).

The rating continues to be supported by Granite’s strong lease profile and financial flexibility. Granite’s lease profile is underpinned by long leases with Magna International Inc. (rated A (low) with a Stable trend by DBRS) and its operating subsidiaries (together, Magna). Granite’s financial flexibility is demonstrated by its investment-grade leverage. At December 31, 2018, Granite prefunded upcoming commitments scheduled to close through the third quarter of 2019 by fully drawing down term loans; as a result, DBRS-calculated total debt-to-EBITDA for the last 12 months (LTM) ending December 31, 2018, was 6.5 times (x). DBRS notes that had Granite not prefunded upcoming contractual commitments, total debt-to-EBITDA would have been 3.5x for the LTM ending December 31, 2018. This prefunding demonstrates Granite’s financial flexibility to execute on its strategic initiatives; principally, to leverage the balance sheet to grow and diversify the Trust’s portfolio. Additional financial flexibility exists as Granite’s real estate portfolio is unencumbered and no secured debt exists in its capital structure. Granite also benefits from a low cost of debt as further evidenced by recently committed senior unsecured term loans and interest-rate swap agreements (see more detail below). The rating continues to be constrained by Granite’s scale in its trade areas with a relatively small and geographically dispersed portfolio; tenant concentration with 75% of annualized revenue derived from the Trust’s top ten tenants (as at December 31, 2018); asset-type concentration with a portfolio solely focused on the industrial segment; execution risks related to implementing its somewhat transformative strategic initiatives; and potential structural subordination from GRHLP’s intermediate holding and operating company subsidiaries.

The Stable rating outlook takes into consideration Granite’s strong progress toward executing its strategic initiatives during the year ended December 31, 2018 (YE2018), as well as subsequent to YE2018, including instating Kevan Gorrie as the new chief executive officer; reducing Magna exposure to 54% of annualized revenue; investing $710 million in acquisitions of modern assets in key e-commerce and distribution markets, mainly in the United States; disposing of $770 million in assets, including several special-purpose properties in Ontario and the United States; contractual commitments of $520 million toward further acquisitions and developments; and increasing liquidity to fund near-term commitments by way of $550 million fully drawn senior unsecured term loans, whereby Canadian-dollar-denominated interest payments were swapped into euro-denominated fixed-rate interest payments at a weighted-average rate of 1.76%. The Stable trend also reflects DBRS’s conservative view of Granite executing its acquisition and development pipeline primarily with debt and the consequent deterioration in leverage, while DBRS estimates total debt-to-EBITDA will remain below 8.0x through YE2020.

DBRS would consider a negative rating action should Granite’s total debt-to-EBITDA increase above 8.0x on a sustained basis, all else equal. Alternatively, DBRS would consider a positive rating action should Granite continue to grow and diversify its portfolio while improving asset quality and maintaining total debt-to-EBITDA below 6.0x on a sustained basis.

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 2019) and DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (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.

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.

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