DBRS Morningstar Confirms First Capital REIT at BBB, Stable

DBRS Limited (DBRS Morningstar) confirmed First Capital Real Estate Investment Trust’s (First Capital or the Trust) Issuer Rating and Senior Unsecured Debentures rating at BBB with Stable trends. The Stable trends take into consideration (1) the ongoing impact of the Coronavirus Disease (COVID-19) pandemic on First Capital's operations through Q1 2021, such as lower-than-normal rent collections (mid-90% range in Q1), elevated bad debt expense ($2.6 million), and lower variable revenues (temporary tenants, storage, parking, etc.) and (2) First Capital's ongoing capital initiatives, such as capital recycling activities and the Trust's temporary distribution cut announced on January 12, 2021.

DBRS Morningstar expects pandemic-related operational impacts to continue to hamper First Capital's results through Q2 2021 before the Trust's operating environment improves in H2 2021, as evidenced by improving trends in rent collections and bad debts since the start of the pandemic as well as the more recent improvement in coronavirus case counts and the loosening of restrictions on mobility. As a result, DBRS Morningstar expects First Capital's total debt-to-EBITDA to trend down to the 11.0 times (x) range by YE2022 from 12.6x at March 31, 2021, on a last-12-months (LTM) basis. While First Capital's recent results reflect modest deterioration relative to DBRS Morningstar's prior expectations, largely as a result of the pandemic, DBRS Morningstar is of the view that First Capital's credit risk profile remains intact at current ratings. Indeed, First Capital recorded positive year-over-year same property net operating income growth of 0.4% in Q1, largely resulting from higher rental rates despite the challenging operating environment.

The Stable trends also consider (1) First Capital’s enhanced financial flexibility resulting from its distribution cut and its continued progress toward executing its super-urban strategy, albeit at a slower pace, as evidenced by the Trust's disposition of noncore assets (net proceeds of $153.3 million, or $170 million gross, in the LTM ended March 31, 2021), which together provide a source of funds for its growth initiatives and debt reduction; (2) ample access to liquidity with $719.7 million available on credit lines and $34.0 million in cash and cash equivalents ($753.7 million combined) at March 31, 2021; (3) manageable maturities of unsecured debt ($200 million 4.43% Series O Senior Unsecured Debentures due January 31, 2022, and $250 million 3.95% Series P Senior Unsecured Debentures due December 5, 2022); and (4) additional financial flexibility afforded by its large pool of quality unencumbered assets with an IFRS value of approximately $6.9 billion, providing 1.8x coverage of unsecured debt (assuming that credit lines are fully drawn).

The ratings continue to be supported by First Capital’s strong market position in its core trade areas through ownership in property assemblies within neighbourhoods, resultant low property concentration risk, highly resilient tenant base, and, most importantly, high-quality portfolio of grocery- and pharmacy-anchored retail properties generating relatively stable income, despite the ongoing pandemic. Elevated leverage continues to constrain the ratings, notwithstanding DBRS Morningstar's expectation for improvement as noted above, as First Capital's capital recycling initiatives re-accelerates through 2022. Additional constraining factors include the Trust's relatively weak EBITDA interest coverage (2.09x in the LTM ended March 31, 2021) and asset type concentration as the Trust is virtually a pure-play retail real estate investment trust, notwithstanding a sizeable development pipeline with more than 20 million square feet of residential density identified and diversification by format (e.g., strip centre, street front, mixed-use, enclosed shopping centre, etc.) and category (e.g., necessity based, service oriented, discretionary, etc.).

DBRS Morningstar would consider a positive rating action if First Capital successfully executes its capital recycling initiatives in a credit-accretive way, such that the Trust's total debt-to-EBITDA declines below 9.8x and EBITDA interest coverage increases above 2.38x on a sustained basis, all else equal. A negative rating action could occur if First Capital’s operating environment deteriorates further, such that the Trust's total debt-to-EBITDA increases above 12.8x on a sustained basis, all else equal.

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.

Notes:
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) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), 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.

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].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577