DBRS Confirms SmartCentres REIT’s Senior Unsecured Debentures at BBB with a Stable Trend

DBRS Limited (DBRS) confirmed the Senior Unsecured Debentures rating of SmartCentres Real Estate Investment Trust (SmartCentres or the Trust) at BBB with a Stable trend. The rating continues to be supported by the Trust’s strong tenant profile with Walmart Inc. (Walmart; rated AA with a Stable trend by DBRS), comprising 25.5% of annualized rental revenue at June 30, 2019; a large portfolio of value-focused shopping centres located across Canada (34.3 million square feet of gross leasable area at June 30, 2019); and the internal growth opportunity provided by its robust development pipeline. The rating continues to be constrained by elevated leverage as measured by total debt to EBITDA of 8.3 times (x) as of the 12 months ended June 30, 2019 (LTM)); concentration risks, including asset-type concentration as a retail-focused real estate entity; tenant concentration with a large proportion of rental revenue derived from a small fraction of tenants (most significantly, Walmart) and geographic concentration with a majority of net operating income generated by properties located in Ontario (most significantly, the Greater Toronto Area); and development risk with $640 million in estimated costs to complete projects (at June 30, 2019) over the next several years, which may fluctuate as projects are completed or as new ones are added.

The Stable trend considers SmartCentres’ improved financial profile, largely resulting from its $230.0 million bought-deal equity offering in January 2019 with excess net proceeds used to pay down debt including mortgages thereby growing its unencumbered asset pool. Declining secured debt and lower interest expense has resulted in EBITDA interest coverage (including capitalized interest) of 3.19x as of the LTM 2019, a secured debt-to-total debt ratio of 45.4% and an unencumbered assets-to-unsecured debt ratio (assuming full draw on the Trust’s revolving credit facility) of 1.7x at June 30, 2019. DBRS expects this improvement in key financial risk metrics to be sustained in the near to medium term as SmartCentres funds its ongoing development pipeline with a combination of capital recycling, equity and incremental debt while EBITDA continues to grow modestly until completed development projects are stabilized in the longer term, thereby contributing materially to EBITDA.

A positive rating action could occur in the near to medium term as SmartCentres continues to reduce secured debt (relative to total debt) and grow its pool of unencumbered assets (with the composition and quality of such assets at least consistent with its overall portfolio) and with further visibility on funding the development pipeline while maintaining a total debt-to-EBITDA ratio below 8.6x and EBITDA interest coverage (including capitalized interest) above 3.0x on a sustained basis. A negative rating action could occur if the Trust’s total debt-to-EBITDA ratio increases above 9.3x.

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

The principal methodologies are Rating Entities in the Real Estate Industry and DBRS Criteria: Guarantees and Other Forms of Support, 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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