DBRS Morningstar Removes Artis REIT from Under Review with Negative Implications; Confirms Ratings at BBB (low)/Pfd-3 (low), Stable Trends

DBRS, Inc. (DBRS Morningstar) removed the ratings of Artis Real Estate Investment Trust (Artis or the REIT) from Under Review with Negative Implications, where they were placed on December 17, 2020. At the same time, DBRS Morningstar confirmed the REIT’s Issuer Rating and Senior Unsecured Debentures rating at BBB (low) and its Preferred Trust Units rating at Pfd-3 (low). All trends are now Stable.

The removal of the Under Review with Negative Implications rating action is the result of Artis’ progress toward improving financial risk metrics, and this progress more than offsets the weakening of business risk factors. Specifically, debt/EBITDA (leverage) and EBITDA/interest (interest coverage) are the two financial risk metrics that are expected to show significant improvement. DBRS Morningstar is now expecting debt-to-EBITDA to be approximately 9.1 times (x) and interest coverage to be 2.99x for 2021. This compares favorably with 9.8x and 2.88x, respectively, at the time the ratings were placed Under Review with Negative Implications (December 2020). More importantly, further improvement in leverage is expected in 2022, culminating with DBRS Morningstar’s expectation of 6.6x leverage in 2023 based on DBRS Morningstar forecasts. The reduction in leverage so far and the anticipated improvement to come is due to the repayment of debt with proceeds from the sale of assets, which more than offsets the reduction of EBITDA from asset sales.

The weakening of the business risk factors (market position, diversification, and size) is related to the ongoing asset dispositions. The most meaningful sale has been Artis’ Greater Toronto Area industrial portfolio in the third quarter of 2021 for $724 million. The sale of assets are part of Artis’ Business Transformation Plan (the Plan) announced in March 2021. With the execution of the Plan, DBRS Morningstar will revise its assessment of Artis’ business risk metrics, as necessary.

A negative rating action is likely if Artis should permit leverage to increase above 9.3x while maintaining EBITDA interest coverage at existing levels, all else unchanged. At the same time, DBRS Morningstar does not anticipate any positive rating action for Artis over the medium term.

ESG CONSIDERATIONS
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.

DBRS Morningstar notes that this press release was amended on March 11, 2022, to correct the Issuer Rating and Senior Unsecured Debentures rating to BBB (low) due to an oversight that affected the text only.

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: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 21, 2021; https://www.dbrsmorningstar.com/research/386355),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).

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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