DBRS Morningstar Confirms Ratings on RioCan Real Estate Investment Trust at BBB, Stable

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating, Senior Unsecured Debentures rating, and Senior Unsecured Debentures, Series I rating of RioCan Real Estate Investment Trust (RioCan or the Trust) at BBB with Stable trends.

The Stable trends consider DBRS Morningstar's following expectations: (1) RioCan will continue to manage leverage as measured by total debt-to-EBITDA trending around the mid-to-high 9.0 times (x) range through YE2024; (2) RioCan's EBITDA interest coverage metric will deteriorate to around 2.7x by YE2024 as the Trust refinances a relatively concentrated near-term maturity ladder at higher rates; (3) RioCan's development execution risks will continue to decline as sizeable projects such as The Well (98% of total commercial square footage leased at September 30, 2022) are completed and stabilized and as RioCan's anticipated annual development budget declines, at least in the near term, which alleviates a previously assessed modest negative; and (4) RioCan will continue to progress its capital recycling initiatives through dispositions of non-core and secondary market assets.

The BBB ratings are strongly supported by (1) high-quality, increasingly necessity-based, urban retail assets in Canada’s six major markets which DBRS Morningstar expects will continue to underpin cash flow stability notwithstanding a deteriorating macro environment; (2) a solid market position as one of the largest real estate investment trusts (REITs) in Canada with 33.4 million square feet (sf) of well-located income-producing net leasable area (NLA) at September 30, 2022; (3) strong lease maturity and tenant profile with long-term leases, low counterparty risk, and above-average tenant diversification; and (4) ample access to liquidity of $1,587.1 million available (consisting of credit facility capacity and cash and cash equivalents) and an unencumbered asset pool valued at $9.0 billion at September 30, 2022.

The ratings continue to be constrained by (1) elevated leverage as measured by RioCan’s total debt-to-EBITDA of 9.9x as of the last twelve months ending September 30, 2022 and per DBRS Morningstar’s above-noted expectations; (2) retail and geographic concentration risks as a retail-focused REIT in Canada’s key urban markets; and (3) execution risks such as DBRS Morningstar's aforementioned expectation for deterioration in RioCan’s EBITDA interest coverage metric, and increasing contingent liabilities amidst an increasingly uncertain macro-economic environment.

DBRS Morningstar may consider a positive rating action should RioCan's financial risk profile improve such that RioCan's total debt-to-EBITDA declines below 8.6x and EBITDA interest coverage improves above 3.0x on a sustained basis while mitigating aforementioned execution risks. DBRS Morningstar would consider a negative rating action should RioCan's total debt-to-EBITDA exceed 10.8x on a sustained basis.

DBRS Morningstar notes that its financial analysis of RioCan and corresponding metrics cited herein have been updated to reflect proportionate share adjustments of equity accounted investments.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

The principal methodology is Rating Entities in the Real Estate Industry (April 20, 2022; https://www.dbrsmorningstar.com/research/395563), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions

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.

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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