DBRS Limited (DBRS Morningstar) changed the trends on Crombie Real Estate Investment Trust (Crombie or the Trust) to Negative from Stable. DBRS Morningstar confirmed the Issuer Rating and Senior Unsecured Debentures rating at BBB (low).
The Negative trends reflect the deterioration in Crombie’s financial risk metrics beyond DBRS Morningstar’s expectations at the time of its last review. At that time, DBRS Morningstar expected the total debt-to-EBITDA ratio to be 10.2 times (x) for YE2020 and 9.5x for YE2021. The actual total debt-to-EBITDA ratio for YE2020 was 10.7x, and DBRS Morningstar now expects it to be 10.5x by YE2021, which is considerably weaker. Notwithstanding deteriorating from prior expectations, DBRS Morningstar has factored in Crombie making progress to deleverage from 2021 to 2022 such that the YE2022 total debt-to-EBITDA ratio is likely to be 9.3x. These expectations are predicated on Crombie's growth activities being funded by the incremental EBITDA from same property net operating income growth and new developments/completions, the recent $100 million equity issuance announced May 10, 2021, and proceeds from negotiated dispositions and incremental debt issuance.
The rating confirmations reflect the Trust's continued focus on improving the size and quality of its portfolio by executing its active major development program and making select noncore asset dispositions. Notwithstanding the short-term earnings drag, DBRS Morningstar expects material EBITDA contributions from completed major developments and land use intensifications, starting in 2022. Furthermore, the confirmation considers DBRS Morningstar’s expectation that the grocery- and pharmacy-anchored nature of the properties, long weighted-average lease term of Crombie’s leases with investment-grade tenants, combined with built-in contractual rental rate increases in most of its leases, should continue to provide stability and predictability to cash flow.
Crombie’s management continues to invest through its strategic relationship with Empire Company Limited/Sobeys Inc. (Sobeys; rated BBB (low) with a Stable trend by DBRS Morningstar) via property acquisitions and capital investments in existing Sobeys-anchored properties and recycling its investments in noncore and lower growth properties to fund major growth initiatives.
A negative rating action could result from weaker operating and earnings performance that leads to financial metrics, including a total debt-to-EBITDA ratio that is higher than 10.5x for YE2021 , all else equal. The trends could return to Stable during the next 12 months if Crombie's performance meets or exceeds DBRS Morningstar’s expectations of a total debt-to-EBITDA ratio of 10.5x for YE2021 and 9.3x for YE2022, all else equal. A positive rating action would likely be the result of improved asset quality and diversification and a decrease in financial leverage such that the total debt-to-EBITDA ratio falls below 8.0x and 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 ratings do not necessarily move in tandem with Sobeys’ ratings. Should Sobeys’ ratings rise to BBB, DBRS Morningstar would likely leave Crombie’s ratings unchanged.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Entities in the Real Estate Industry (April 23, 2021; https://www.dbrsmorningstar.com/research/377358), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), and DBRS Morningstar Criteria: Preferred Share and Hybrid Securities Criteria for Corporate Issuers (November 2, 2020; https://www.dbrsmorningstar.com/research/369165), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).
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.
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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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