DBRS Downgrades Rating of First Capital Realty’s Senior Unsecured Debentures to BBB and Changes Status to Under Review – Developing

DBRS Limited (DBRS) downgraded the rating of First Capital Realty Inc.’s (First Capital or the Company) Senior Unsecured Debentures to BBB from BBB (high) following the closing of the Company’s debt-financed repurchase for cancellation of $742 million common shares from Gazit-Globe Ltd. (the Share Repurchase Transaction). This rating action resolves the Under Review – Negative status initiated on March 1, 2019. DBRS is changing the status to Under Review with Developing Implications until it reviews legal documentation evidencing First Capital’s previously announced conversion to a real estate investment trust (REIT) (the REIT Conversion Transaction). DBRS will resolve the Under Review status no later than closing of the REIT Conversion Transaction.

The downgrade reflects First Capital’s elevated leverage, as measured by total debt-to-EBITDA, which is expected to peak at 11.6 times (x) (DBRS estimate) immediately following close of the Share Repurchase Transaction on April 16, 2019. DBRS acknowledges the Company’s concurrently announced intention to pay down indebtedness by way of full or partial property dispositions representing 10% to 15% of the Company’s portfolio over the next two years while improving the quality of its portfolio by disposing of non-core assets combined with further investments in its core urban markets. However, DBRS views the quantum of increased leverage (as measured by total debt-to-EBITDA) combined with the uncertainty around timing and the impact of dispositions (and hence a return to leverage levels more commensurate for the previous rating) to warrant a one-notch downgrade. Indeed, DBRS anticipates that First Capital’s total debt-to-EBITDA will remain above current levels (DBRS estimate of 9.9x as at December 31, 2018, on a last 12 months basis), already deemed elevated by DBRS, through 2020.

The rating is supported by the Company’s stable portfolio of supermarket- and drugstore-anchored retail properties, leading market position within its core trade areas, resilient tenant base, development capabilities and low proportion of secured debt. DBRS notes that First Capital is fully funding the Share Repurchase Transaction with unsecured term loans with maturities ranging from four to seven years and thus expects the Company’s secured debt-to-total debt ratio to remain comfortably below 40% on a sustained basis (DBRS estimate of 33.3% as at December 31, 2018). The rating also takes into consideration First Capital’s evolved urban investment strategy with a heightened focus on dispositions of non-core assets and capital recycling to lower leverage and fund redevelopment and intensification projects in its core urban markets, which should lead to improving portfolio quality and productivity of underlying real estate.

A positive rating action could result as First Capital executes on its disposition program and brings leverage back down to management-indicated levels prior to the Share Repurchase Transaction, as measured by total debt-to-EBITDA below 9.8x on a sustained basis, all else equal. DBRS does not anticipate a negative rating action in the foreseeable future, assuming DBRS’s satisfactory review of legal documentation concerning the REIT Conversion Transaction.

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: Rating Corporate Holding Companies and Their Subsidiaries (November 2018), DBRS Criteria: Guarantees and Other Forms of Support (January 2019) 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.

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