DBRS Morningstar Removes Cominar Real Estate Investment Trust’s Ratings from Under Review with Developing Implications and Confirms Ratings at BB (high) With Stable Trends

DBRS Limited (DBRS Morningstar) removed Cominar Real Estate Investment Trust’s (Cominar or the Trust) Issuer Rating and Senior Unsecured Debentures rating from Under Review with Developing Implications and confirmed both ratings at BB (high) with Stable trends. The recovery rating on the Senior Unsecured Debentures was revised to RR3 from RR4. These rating actions conclude the Under Review with Developing Implications status placed on October 27, 2021, following the announcement that Cominar had entered into an arrangement agreement to be privatized by Iris Acquisition II LP backed by a consortium of investors (the Transaction).

The rating confirmations consider the impact of the transformational Transaction on Cominar’s business and financial risk assessments. As part of the Transaction, certain Cominar retail and office properties were acquired by Groupe Mach Acquisition Inc. for approximately $1.5 billion and Cominar’s industrial real estate portfolio was acquired by Blackstone for an undisclosed price. Gross proceeds were used to significantly reduce the Trust’s outstanding indebtedness, including the early repayment of approximately two-thirds of Cominar’s outstanding Senior Unsecured Debentures following the change of control event. The Transaction transformed Cominar from a highly leveraged, publicly traded real estate investment trust with an average-size diversified portfolio into a private entity with a smaller, concentrated portfolio with lower leverage. As a result, DBRS Morningstar has lowered its assessment of the Trust’s market position, diversification, and portfolio size commensurately. On the other hand, DBRS Morningstar acknowledges the improvement in Cominar’s lease maturity profile and tenant quality with lower counterparty risk and longer lease terms as well as the improvement in Cominar’s total debt-to-EBITDA metric.

Indeed, the Stable trends reflect the considerable progress Cominar has made in deleveraging its balance sheet post Transaction and consider DBRS Morningstar's expectation that the Trust’s total debt-to-EBITDA will fluctuate around high 9.0 (x) times before improving to the mid 8.0 times (x) range through YE2023 as Cominar continues to recycle capital. Nevertheless, the Trust’s leverage remains elevated for the rating. DBRS Morningstar expects Cominar’s EBITDA interest coverage will fluctuate near current levels (2.28x in the last 12 months ended June 30, 2022) through YE2023. The Stable trends also consider Cominar’s limited access to liquidity, thus relying on cash flow from operations and its unencumbered asset pool valued at approximately $1.0 billion as at June 30, 2022. DBRS Morningstar assesses the Trust’s current access to liquidity as modestly credit negative. These factors combined serve to limit Cominar’s financial flexibility at the current rating level.

The ratings continue to be supported by Cominar’s average-quality assets with several notable properties, tenant diversification, and some asset type diversification, as well as its improving lease maturity profile and tenant quality with well-laddered lease maturities and low counterparty risk, tenant diversification, and sufficient EBITDA interest coverage. The ratings continue to be constrained by Cominar’s elevated leverage and geographic concentration, as well as by its small size, limited market position, and property concentration.

DBRS Morningstar has revised its assessment of Cominar’s recovery rating to RR3 from RR4 as a result of more residual enterprise value available to satisfy unsecured debt holders (i.e., proportionately less secured debt ranking ahead of unsecured debt) under DBRS Morningstar’s assumed default and valuation scenarios. While DBRS Morningstar considers a recovery rating of RR3, representing 60% to 80% recovery, as good, there continues to be no notching impact on Cominar’s Senior Unsecured Debentures rating.

DBRS Morningstar would consider negative rating actions should Cominar’s total debt-to-EBITDA deteriorate above 9.2x on a sustained basis, all else being equal. Given the challenges noted above such as declining business risk assessment factors and elevated leverage, DBRS Morningstar views positive rating actions as highly unlikely in the near to medium term.

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 Global Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (September 1, 2022; https://www.dbrsmorningstar.com/research/402218), 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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