DBRS Limited (DBRS Morningstar) changed the trends on Summit Industrial Income Real Estate Investment Trust's (Summit or the REIT) Issuer Rating and Senior Unsecured Debentures rating to Positive from Stable and confirmed the ratings at BBB (low).
The Positive trends consider the speed with which the REIT has transitioned to a predominantly unsecured debt capital structure, as exemplified by the following: (1) Summit's ongoing successful issuance of Senior Unsecured Debentures with proceeds primarily used to repay mortgages, thereby unencumbering a larger portion of Summit's portfolio—$2.7 billion pro forma the 2.44% Series D Senior Unsecured Debenture (the Series D Debentures) offering of $225 million in July 2021—and reducing Summit's secured debt-to-total debt ratio to the 30% range, pro forma the Series D Debentures, and (2) Summit's September 15, 2021, announcement to issue $110 million in REIT units with proceeds used to fund the acquisition of a modern e-commerce logistics centre in Calgary. The Positive trends also consider DBRS Morningstar's expectations for significant growth in EBITDA to approximately $148 million by year-end (YE) 2022, largely as a result of recent property acquisitions and same-property net operating income growth. DBRS Morningstar expects that EBITDA growth will help to drive material improvement in key credit metrics, particularly total debt-to-EBITDA in the mid-to-low 8.0 times (x) range by YE2023.
Notwithstanding the low proportion of secured debt in Summit's capital stack, Summit's leverage remains elevated with total debt-to-EBITDA at 9.4x the last 12 months (LTM) ended June 30, 2021. DBRS Morningstar expects Summit's total debt-to-EBITDA metric to trend lower over time, approaching the mid-to-low 8.0x range by YE2023 as Summit continues to fund growth capital expenditure from balanced sources of both equity and debt and continues to benefit from strong secular tailwinds in the industrial real estate segment. While DBRS Morningstar normally awards uplift to ratings of real estate issuers with a low proportion of secured debt, Summit's ratings are not being upgraded until Summit can consistently demonstrate total debt-to-EBITDA below 8.6x, assuming all else equal.
The ratings consider Summit's exposure to the Greater Toronto Area, as well as Alberta, and its continued strategy to acquire and develop credit-accretive industrial assets. Relative to DBRS Morningstar’s real estate coverage universe, the ratings continue to be supported by (1) adequate-quality assets that should provide average cash flow stability; (2) superior property and tenant diversification; (3) a well-laddered lease maturity profile; and (4) strong interest coverage for the ratings as measured by EBITDA interest coverage, expected to be in the mid-4x range by YE2023. Relative to DBRS Morningstar’s real estate coverage universe, the ratings continue to be constrained by (1) elevated leverage for the rating, while DBRS Morningstar recognizes Summit's improving trend; (2) a below-average portfolio size as measured by EBITDA of $138.9 million as at the LTM ended June 30, 2021, notwithstanding DBRS Morningstar's expectation for continued growth in the near to medium term; (3) weak asset-type diversification as a pure play in the light-industrial segment; and (4) below-average tenant quality.
DBRS Morningstar could upgrade the ratings within the next 12 months if Summit can demonstrate total debt-to-EBITDA below 8.6x on a sustained basis, or demonstrate improvement in business risk assessment metrics. DBRS Morningstar would consider changing the trends to Stable if Summit's total debt-to-EBITDA ratio fails to improve as expected.
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) 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).
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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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