DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating, Senior Unsecured Debentures rating, and Senior Unsecured Debentures, Series I rating of RioCan Real Estate Investment Trust (RioCan or the Trust) at BBB (high). DBRS Morningstar also changed the trends on the ratings to Negative from Stable.
The change to Negative trends reflects DBRS Morningstar's assessment of deterioration in RioCan's financial risk metrics relative to expectations since our previous rating action on November 12, 2019. DBRS Morningstar is of the view that the deterioration has largely been driven by the negative impact of the Coronavirus Disease (COVID-19) pandemic on the Trust's operations, resulting in material declines in EBITDA, contrary to DBRS Morningstar’s prior (pre-pandemic) expectations for stable growth.
DBRS Morningstar expects total debt-to-EBITDA to deteriorate further on an interim basis to the 10.5 times (x)-range by YE2020 from 10.2x at the last 12 months ended September 30, 2020, before improving to below 10.0x by YE2021 and below 9.3x by YE2022. DBRS Morningstar expects EBITDA interest coverage will remain around the 3.0x range through 2021 before improving to over 3.2x by YE2022. This revised outlook contrasts with DBRS Morningstar's prior expectations for RioCan's total debt-to-EBITDA and EBITDA interest coverage of approximately 9.0x and 3.2x, respectively, through 2021. DBRS Morningstar's outlook for key financial risk metrics contemplate the following expectations: (1) RioCan's provisions for rent abatement and bad debts will trend lower through 2021 supported by a normalizing economy evidenced by cash rent collections continuing to trend higher to 93.4% in Q3 as of October 28, 2020, from 84.5% in Q2; (2) the ongoing completion and stabilization of the Trust's development projects; (3) RioCan’s continued funding of its development program from diverse sources including its capital recycling initiatives whereby the Trust disposes of partial interests or noncore assets; and (4) an orderly transition to a new chief executive officer effective April 1, 2021.
The rating confirmations consider RioCan’s (1) high quality, increasingly necessity-based, urban retail assets in Canada’s six major markets; (2) solid market position as one of the largest real estate investment trusts (REITs) in Canada with 35.9 million square feet of well-located income-producing net leasable area at September 30, 2020; (3) strong lease maturity and tenant profile with long-term leases, low counterparty risk, and above-average tenant diversification; and, (4) aforementioned expectation for strong EBITDA interest coverage and ample access to liquidity at September 30, 2020, of $753.1 million available (credit facility capacity and cash and cash equivalents) with an unencumbered asset pool valued at $8.6 billion ($803.4 million and $8.7 billion at proportionate share, respectively) providing 1.9x coverage over unsecured debt (assuming fully drawn credit facilities). The ratings continue to be constrained by (1) the aforementioned elevated leverage as measured by total debt-to-EBITDA; (2) retail and geographic concentration risks as a retail-focused REIT in Canada's key urban markets; and (3) development execution risk with over $1.0 billion in estimated costs over the next three years.
In the absence of sustained improvements in RioCan’s total debt-to-EBITDA and EBITDA interest coverage metrics over the next 12 months consistent with our expectations outlined above, DBRS Morningstar will likely consider rating downgrades. DBRS Morningstar may consider restoring the Stable trends if total debt-to-EBITDA and EBITDA interest coverage demonstrate improving trends below 9.3x and above 3.2x, respectively, on a sustained basis by YE2022.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Entities in the Real Estate Industry (June 4, 2020) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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 email@example.com.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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