DBRS Morningstar Confirms SmartCentres Real Estate Investment Trust’s Ratings at BBB (high), Maintains Negative Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debentures rating of SmartCentres Real Estate Investment Trust (SmartCentres or the Trust) at BBB (high) and maintained the Negative trends.

The confirmations reflect DBRS Morningstar’s following expectations: (1) SmartCentres will execute on certain deleveraging initiatives in the near term, such as using the proceeds of the recently repaid Penguin loan receivables to repay debt in the interim period, among others, resulting in an improving pro forma total debt-to-EBITDA ratio of 10.3 times (x) from 11.0 times (x) for the last 12 months ended September 30, 2022; (2) SmartCentres will continue to execute credit accretive transactions so the Trust’s total debt-to-EBITDA ratio will drop to the low 9.0x range through YE2024; and (3) SmartCentres’ EBITDA interest coverage metric will remain strong in the low 3.0x range through YE2024.

The Negative trends consider DBRS Morningstar’s updated expectations for SmartCentres’ total debt-to-EBITDA and EBITDA interest coverage metrics, per above, which reflect the Trust’s delay in executing its deleveraging initiatives relative to prior expectations while EBITDA interest coverage remains strong, notwithstanding rising interest rates. The Negative trends also consider DBRS Morningstar’s limited visibility on the Trust’s further capital recycling initiatives in 2024, which DBRS Morningstar anticipates will occur at a relatively modest pace through 2024, particularly in light of the deteriorating macroeconomic environment.

The BBB (high) ratings continue to be supported by SmartCentres’ (1) strong tenant profile with Walmart Inc. (Walmart; rated AA with a Stable trend by DBRS Morningstar) representing 25.3% of annualized rental revenue at September 30, 2022 (remaining average lease term of 4.9 years); (2) large retail property portfolio with new, large, and open-format Walmart-anchored shopping centres generating stable cash flow; and (3) predominately unsecured debt capital stack (secured debt-to-total debt ratio of 24.7% at September 30, 2022) and sizable unencumbered asset pool ($8.4 billion), which together warrant a one-notch uplift to SmartCentres' stand-alone credit assessment.

The ratings continue to be constrained by (1) elevated leverage as measured by the Trust's total debt-to-EBITDA ratio noted above; (2) concentration risks, such as asset-type concentration in retail, tenant concentration (most significantly, Walmart), and geographic concentration in the Greater Toronto Area; and (3) potentially increasing development execution risks, such as construction risks affecting timelines and budgets, leasing, sales, counterparties in joint arrangements, and funding risks, among others, that together may increase volatility of cash flows and metrics. As a result of potentially increasing development execution risks, DBRS Morningstar would expect SmartCentres to operate with an increased buffer relative to threshold metrics for a given rating level.

Ratings downgrades are likely within the next few quarters should SmartCentres fail to demonstrate measurable progress toward executing deleveraging initiatives such that the total-debt-to-EBITDA ratio remains above 9.3x and EBITDA interest coverage deteriorates to below 3.0x on a sustained basis, all else being equal. Conversely, the trends may change to Stable should SmartCentres demonstrate EBITDA growth or greater-than-expected progress toward deleveraging initiatives such that DBRS Morningstar has concrete visibility (say, from committed transactions) that the Trust’s total debt-to-EBITDA metric will decline comfortably below 9.3x in the near term on a sustained basis, all else being equal.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no environmental, social, and 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/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 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.

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 generally 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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