DBRS Morningstar Changes Trends on Crombie Real Estate Investment Trust to Stable from Negative, Confirms Ratings at BBB (low)

DBRS Limited (DBRS Morningstar) changed the trends on Crombie Real Estate Investment Trust (Crombie or the Trust) to Stable from Negative (which were placed on June 7, 2021) and confirmed the Issuer Rating and Senior Unsecured Debentures rating at BBB (low).

The change to Stable trends reflects an improvement in Crombie’s financial risk metrics compared with DBRS Morningstar’s expectations at the time of its last review. Crombie's actual total-debt-to-EBITDA ratio for the last 12 months ended March 31, 2022, was 9.6 times (x) (including Crombie's share of joint-venture debt), which is lower than DBRS Morningstar's expectations during the last review. At that time, DBRS Morningstar expected the total-debt-to-EBITDA ratio to be 10.5x for YE2021 and 9.3x for YE2022. DBRS Morningstar has factored in Crombie making continued modest progress in deleveraging such that it expects the total debt-to-EBITDA ratio to be in the low 9x range in the near to medium term. These expectations are predicated on Crombie's robust development and acquisitions-related growth initiatives being largely prefunded via proceeds from asset sales and/or equity issuances and supported by stabilization of recently completed developments.

The Stable trends also reflect DBRS Morningstar's assessment of improvements in Crombie's asset quality and lease maturity profile/tenant quality. In DBRS Morningstar's view, Crombie's asset quality has improved as a result of ongoing high grading of its portfolio through developments, modernizations, acquisitions, and dispositions with a strategic focus on high-growth urban markets. DBRS Morningstar assesses improvement in Crombie's lease maturity profile/tenant quality, giving consideration for its long and spread out lease maturity profile and largely investment-grade-rated tenant roster as the credit profile of its largest tenant, Sobeys Inc. (Sobeys; rated BBB (low) with a Positive trend by DBRS Morningstar), stabilizes and improves.

The ratings continue to be supported by Crombie's grocery- and pharmacy-anchored properties, long weighted-average lease terms with investment-grade tenants, built-in contractual rental rate increases in most of its leases, geographically diverse portfolio, and strategic relationship with Empire Company Limited/Sobeys Inc. The ratings continue to be constrained by elevated leverage, development execution risk, asset type and tenant concentration, and a relatively small portfolio with exposure to secondary and tertiary Canadian markets.

A positive rating action could result from a significant decrease in financial leverage such that Crombie's total debt-to-EBITDA ratio falls below 8.0x on a sustained basis, all else being equal. A negative rating action could result from weaker operating and earnings performance that hurts financial metrics, including a total debt-to-EBITDA ratio that is higher than 10.8x on a sustained basis, all else being equal.

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.

ENVIRONMENTAL, SOCIAL, and GOVERNANCE CONSIDERATIONS
There were no environmental, social, or governance factors that had a significant or relevant effect on the credit analysis.

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/396929.

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

The principal methodologies are Rating Entities in the Real Estate Industry (April 20, 2022; https://www.dbrsmorningstar.com/research/395563) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), 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 (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

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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