DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debentures rating of Artis Real Estate Investment Trust (Artis or the REIT) at BBB (low) and its Preferred Trust Units rating at Pfd-3 (low). All ratings have Stable trends.
The Stable trends reflect DBRS Morningstar's expectation that the REIT will continue to execute its Business Transformation Plan launched in March 2021 and use the asset disposition proceeds to repay debt in the interim period, resulting in an improving trend in Artis' total debt-to-EBITDA metric to the low 9.0 times (x) range by YE2024 from 11.6x for the last 12 months ended September 30, 2022 (or the 10.3x expected at YE2022 following recently announced deleveraging initiatives), while the REIT's EBITDA interest coverage metric fluctuates around 2.7x.
The confirmation of Artis' ratings considers DBRS Morningstar's improved assessment of the REIT's business risk factors (e.g., market position, diversification, and portfolio size), as DBRS Morningstar now expects the REIT to dispose of fewer assets than previously expected; thus, the real estate business fundamentals have strengthened in DBRS Morningstar’s view. On the other hand, Artis' leverage is elevated relative to DBRS Morningstar’s prior expectations because of the timing of investments (e.g., Cominar Real Estate Investment Trust (rated BB (high) with a Stable trend by DBRS Morningstar), opportunistic investments in publicly listed REITs) and dispositions (e.g., approximately $111 million for the last 12 months ended September 30, 2022), with the former occurring at an accelerated pace and the latter lagging, with the difference being funded largely using unsecured credit facilities.
Artis' BBB (low) ratings reflect its well-diversified, albeit reduced, stable and recurring income-producing portfolio through economic cycles, high-quality tenant mix, and lack of aggressive expansion and development activities. DBRS Morningstar expects Artis to maintain relatively stable EBITDA in 2023 and 2024 based on the REIT’s ability to maintain strong occupancy levels and achieve modest increases in rental rates across its portfolio. The ratings are however constrained by Artis' elevated financial leverage; modest market presence as a diversified, albeit relatively small real estate entity; and execution risk related to its business transformation strategy, which together limit financial flexibility in the current rating category.
A negative rating action would be likely should Artis fail to demonstrate measurable progress toward executing deleveraging initiatives such that the total debt-to-EBITDA ratio remains above 9.8x and EBITDA interest coverage deteriorates to below 2.70x on a sustained basis, all else being equal. At the same time, DBRS Morningstar does not anticipate any positive rating action for Artis over the medium term.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/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).
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies applicable to the ratings are Rating Entities in the Real Estate Industry (April 20, 2022; https://www.dbrsmorningstar.com/research/395563) and DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 20, 2022; https://www.dbrsmorningstar.com/research/404248).
The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
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.
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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.
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