DBRS Confirms Crombie Real Estate Investment Trust’s Senior Unsecured Debentures at BBB (low), with a Stable Trend

DBRS Limited (DBRS) confirmed the rating of Crombie Real Estate Investment Trust’s (Crombie or the Trust) Senior Unsecured Debentures at BBB (low) with a Stable trend. The confirmation reflects DBRS’s expectation for Crombie to maintain key financial metrics at current levels and to continue to focus on improving portfolio quality through property dispositions and executing on its active major development program. The confirmation also considers DBRS’s expectation that the long-term nature of Crombie’s leases, combined with built-in contractual rental rate increases in the majority of its leases, should provide stability and predictabil¬ity to cash flow and good protection from unfavourable changes in market conditions.

Crombie’s management expects to invest, on average, $100 million annually in its strategic Empire Company Limited/Sobeys Inc. (Sobeys; rated BB (high) with a Positive trend by DBRS) relationship via property acquisitions and capital investments in existing Sobeys-anchored properties and to continue to cull its portfolio of non-core and lower growth properties to fund growth initiatives. Crombie has embarked on a major development program with an estimated investment potential of $3 billion to $4.5 billion. DBRS believes development will be the main growth driver over the next ten to fifteen years. Although there are risks associated with property development, DBRS expects Crombie to reduce these risks by completing the developments in phases and, in certain cases, with experienced development partners. Five near-term active development projects have the potential to add up to 255,000 square feet of commercial gross leasable area and up to 1,200 residential rental units by 2021. These five near-term development projects are forecast to cost around $500 million and could potentially contribute incremental annual net operating income of between $26 million and $31 million, at Crombie’s share, upon completion and stabilization.

The current rating incorporates DBRS’s expectation that Crombie’s leverage level at the end of 2020 is close to current levels (9.5 times (x) as at December 31, 2018) and EBITDA interest coverage remains in the range of 2.40x (including capitalized interest). Debt-to-EBITDA could increase modestly on a temporary basis until projects currently in development are completed and start contributing EBITDA in the second half of 2020. Similarly, DBRS acknowledges that EBITDA interest coverage (including capitalized interest) could fall below 2.40x, but only on a temporary basis, as the Trust is likely to incur interest costs to fund its development projects prior to receiving EBITDA contributions upon their completion.

A negative rating action could result from weaker operating and earnings performance that leads to higher financial leverage, such that debt-to-EBITDA rises above 9.7x or EBITDA interest cover¬age falls below 2.20x on a sustained basis. A positive rating action would likely be the result of improved asset quality and diversification and a decrease in financial leverage such that debt-to-EBITDA falls below 8.0x or EBITDA interest coverage rises above 3.00x on a sustained basis.

While common ownership and the strong connection between Sobeys’ and Crombie’s operations closely align their interests, Crombie’s rating does not necessarily move in tandem with Sobeys’ ratings. Should Sobeys’ rating be upgraded to BBB (low), it is likely that DBRS would maintain Crombie’s rating at BBB (low).

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

The principal methodologies are Rating Entities in the Real Estate Industry, DBRS Criteria: Guarantees and Other Forms of Support, DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries and DBRS Criteria: Preferred Shares and Hybrid Security Criteria for Corporate Issuers, 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.

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