DBRS Morningstar Changes Trends on Cominar Real Estate Investment Trust to Negative from Stable, Confirms Ratings at BB (high)

DBRS Limited (DBRS Morningstar) changed the trends on Cominar Real Estate Investment Trust’s (Cominar or the Trust) Issuer Rating and Senior Unsecured Debentures rating to Negative from Stable and confirmed the ratings at BB (high). The recovery rating on the Senior Unsecured Debentures is RR4. The Negative trends reflect Cominar’s deteriorating financial risk profile (i.e., debt/EBITDA leverage and EBITDA interest coverage) relative to DBRS Morningstar’s expectations as outlined in its press release dated November 29, 2019. The rating confirmations consider the Trust’s (1) strong portfolio diversification by asset type, tenant, and property, despite some exposure to suburban office properties; (2) leading market position in the Province of Québec (rated AA (low) with a Stable trend by DBRS Morningstar; (3) notable assets in its property portfolio; and (4) good lease maturity profile and tenant quality. The rating confirmations incorporate the Trust’s high leverage and geographic concentration in the Greater Montréal Area and Québec City. DBRS Morningstar acknowledges that Cominar is evaluating strategic initiatives, which includes a focus on liquidity and debt reduction; when details are forthcoming, DBRS Morningstar will assess the implications on the Trust’s credit risk profile.

The Negative trends reflect DBRS Morningstar’s assessment that Cominar’s financial risk metrics have deteriorated relative to expectations over the last year. DBRS Morningstar now forecasts a debt-to-EBITDA ratio of 11.5 times (x) and 11.0x for 2021 and 2022, respectively, versus about 10.0x or below in 2021 and 2022 at the time of DBRS Morningstar’s last press release on November 19, 2019. Additionally, DBRS Morningstar now expects EBITDA-to-interest to be in the 2.10x to 2.20x range for the next two years compared with previous expectations of 2.40x to 2.50x range. For the last 12 months ended September 30, 2020 (LTM 2020), the Trust’s leverage increased to 11.4x from 10.6x in 2019 and 10.3x in 2018 while EBITDA interest coverage (including capitalized interest) declined to 2.01x from 2.20x in 2019 and 2.23x in 2018. The deterioration in these metrics primarily results from the Coronavirus Disease (COVID-19) pandemic, especially in Cominar’s retail portfolio, as well as its disposition program.

DBRS Morningstar notes that Cominar maintains a strong market presence in Montréal and Québec City; however, its earnings profile has weakened in recent years as a result of noncore asset dispositions, which have lowered total gross leasable area to 35.8 million square feet and reduced revenues, net operating income, EBITDA, and related debt. Provisions related to rent abatements and bad debts associated with the coronavirus pandemic have affected Cominar’s earnings profile; as a result, in 2021, DBRS Morningstar anticipates that these items will exceed $15 million before declining to pre-pandemic levels. For the LTM 2020, Cominar had EBITDA of $322.0 million, down from $350.6 million in F2019 and trending downward since 2016. Although EBITDA has declined, in-place occupancy remained stable at 91.3% as at September 30, 2020. On a committed basis, portfolio occupancy remains about 3% higher than in-place occupancy with committed occupancy of 93.8% as at September 30, 2020. The EBITDA margin was 47% for the LTM 2020, further compressed from the 48% range in F2018 and F2019.

Despite the reduction in EBITDA, Cominar’s strong ability to attract a broad range of tenants for its office, retail, and industrial segments continues to support its earnings profile. The Trust demonstrates its bargaining power in Montréal, where it has negotiated committed occupancy in the 88% to 95% range for office, retail, and industrial tenants and in Québec City, where it has negotiated committed occupancy in the 85% to 97% range for office, retail, and industrial tenants.

DBRS Morningstar will likely consider a rating downgrade within the next 12 months if (1) Cominar’s total debt-to-EBITDA ratio remains above 10.0x or its EBITDA interest coverage ratio remains below 2.25x, on a sustained basis, all else equal; (2) DBRS Morningstar foresees elevated liquidity or refinancing risks; or (3) the result of the strategic review negatively affects the Trust’s credit quality. DBRS Morningstar may change the trend on the ratings to Stable if Cominar successfully generates sufficient liquidity to maintain balance sheet flexibility and retire near-term obligations, in particular the $264 million in debt maturities coming due in 2021, and consistently maintains a debt-to-EBITDA ratio below 9.5x.

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.

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

The principal methodologies are Rating Entities in the Real Estate Industry (June 4, 2020), DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (August 24, 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 protected].

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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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