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

DBRS, Inc. (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 to the mid 9.0 times (x) range at YE2025; (2) RioCan's EBITDA interest coverage metric will decrease to around 2.5x by YE2025 as the Trust refinances near-term maturities in the current high-interest-rate environment; (3) RioCan will complete and continue to lease-up the residential rental units at FourFifty The Well and continue to progress on its condominium/townhouse construction and closings; and (4) RioCan will put a short-term pause on new construction in 2024, lowering development spending as it focuses on the zoning process in its development pipeline.

The BBB credit 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 32.8 million square feet (sf) of well-located income-producing net leasable area (NLA) at September 30, 2023; (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 $1,633.9 million (consisting of credit facility capacity, construction lines and bank loans, and cash and cash equivalents) and an unencumbered asset pool valued at $8.5 billion at September 30, 2023.

The credit ratings continue to be constrained by (1) elevated leverage as measured by RioCan's total debt-to-EBITDA (10.3x as of the last 12 months ending September 30, 2023); (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 amid an increasingly uncertain macroeconomic environment.

DBRS Morningstar may consider a positive credit 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 credit rating action should RioCan's total debt-to-EBITDA deteriorate above 10.8x, on a consistent basis, all else equal.

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

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/416784 (July 4, 2023).

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

DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Entities in the Real Estate Industry (April 11, 2023; https://www.dbrsmorningstar.com/research/412477)

The credit 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.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

These are solicited credit ratings.

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 credit ratings are under regular surveillance.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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