Morningstar DBRS Confirms Credit Ratings on CT Real Estate Investment Trust and CT REIT Limited Partnership at BBB With Stable Trends

DBRS, Inc. (Morningstar DBRS) confirmed CT Real Estate Investment Trust's (the Trust) Senior Unsecured Debentures credit rating and CT REIT Limited Partnership's (CT REIT LP; collectively with the Trust, CT REIT) Issuer Rating at BBB. Both trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings reflect CT REIT's risk profile, and the credit ratings are aligned with those of Canadian Tire Corporation, Limited (CTC; rated BBB with a Stable trend by Morningstar DBRS), largely because CTC effectively controls CT REIT through its majority ownership and is the most substantial tenant of CT REIT, among other reasons.

The credit ratings reflect CT REIT's weakened financial risk assessment, particularly EBITDA interest coverage, as Morningstar DBRS expects this metric to deteriorate as maturing debt is refinanced in the near to medium term in a higher interest rate environment. As a result of the weakened financial risk assessment, the credit ratings reflect the removal of a negative overlay that was applied to previously align the credit ratings with those of CTC.

While CTC does not provide explicit support to CT REIT LP, Morningstar DBRS assesses the level of CTC's implicit support to CT REIT LP as strong, based on the following considerations:
(1) There are substantial contractual arrangements between CT REIT and CTC, including long-term lease agreements, service agreements, and property management agreements.
(2) CT REIT LP is essential to the operation of CTC. CT REIT LP is CTC's most significant landlord for the foreseeable future.
(3) CTC's effective ownership of CT REIT was 68.4% of CT REIT's equity as at December 31, 2023.
(4) CT REIT's reputational risk implications to CTC are high, given their strong interconnection.
(5) Integration of CTC and CT REIT is strong through strategies, operations, and oversight.

The credit rating on the Trust's Senior Unsecured Debentures reflects (1) Morningstar DBRS' expectation that no additional unsecured debt will be issued by CT REIT LP, excluding its existing credit facilities; (2) Morningstar DBRS' expectation that future unsecured debentures will be issued only at the Trust level; (3) the Trust's Senior Unsecured Debentures ranking pari passu with the Class C LP units held by CTC in terms of distributions and claims that result in a low level of prior-ranking debt (i.e., the sum of secured debt, such as mortgages, and the limit on the unsecured credit facilities at CT REIT LP) in CT REIT's debt structure (i.e., less than 40% of total debt); and (4) a provision in CT REIT LP's credit facility that cross defaults to CTC under certain conditions.

CTC's stated intention is to remain the majority unitholder of CT REIT over the long term. If CTC's ownership or control in CT REIT diminishes materially or if CTC no longer represents a material proportion of CT REIT's portfolio, by size or by rent received, CT REIT's credit risk profile could be assessed on a stand-alone basis using Morningstar DBRS' "Global Methodology for Rating Entities in the Real Estate Industry."

In the event that CT REIT's credit risk profile is assessed on a stand-alone basis, Morningstar DBRS notes that CT REIT LP's Issuer Rating and the Trust's Senior Unsecured Debentures credit rating would be limited to CTC's credit rating on account of a provision in CT REIT LP's credit facility that cross defaults to CTC under certain conditions, and the Senior Unsecured Debentures rank pari passu with CT REIT LP's Class C LP units.

CREDIT RATING DRIVERS
Morningstar DBRS would consider a negative credit rating action in the event that CTC's credit ratings are downgraded. Morningstar DBRS would consider a positive credit rating action should both of the following factors occur on a sustained basis: (1) CTC's credit ratings are upgraded, and (2) CT REIT's key financial metrics improve relative to expectations on a sustained basis, all else equal.

FINANCIAL OUTLOOK
Morningstar DBRS anticipates CT REIT's leverage measured by total debt-to-EBITDA to remain around the mid- to high 6 times (x) range, given the pace of growth and stability of EBITDA and cash flows. Morningstar DBRS expects EBITDA interest coverage to remain around 3.5x. Morningstar DBRS notes that CT REIT's credit ratings consider a minimal increase in debt over the next 12 to 24 months and expects leverage metrics to remain around current levels and EBITDA interest coverage to deteriorate in a higher interest rate environment.

CREDIT RATING RATIONALE
The credit ratings continue to be supported by (1) Morningstar DBRS' view of CT REIT's strategic relationship with CTC, (2) CT REIT's well-located portfolio of retail properties in Canada's top urban markets, and (3) CT REIT's long-term leases with stable cash flows. The credit ratings continue to be constrained by (1) concentration risks in the form of significant tenant concentration with CTC and asset type concentration, and (2) exposure to secondary and tertiary markets.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of the Trust and CT REIT LP, the BRA factors were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of the Trust and CT REIT LP, the FRA factors were considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of the Trust and CT REIT LP, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Entities in the Real Estate Industry (April 15, 2024), https://dbrs.morningstar.com/research/431170

The following criteria has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings
-- Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The credit rating was 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.

Morningstar DBRS 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.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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