Morningstar DBRS Confirms Credit Ratings on Crombie Real Estate Investment Trust at BBB (low) and Changes Trends to Positive From Stable

DBRS, Inc. (Morningstar DBRS) confirmed the Issuer Rating and Senior Unsecured Debentures rating of Crombie Real Estate Investment Trust (Crombie or the Trust) at BBB (low) and changed the trends to Positive from Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings reflect Crombie's strong operating results in Crombie’s grocery- and pharmacy-anchored properties and its continued momentum in the stabilization of its recently completed developments. Crombie's financial risk metrics met Morningstar DBRS' expectations as total-debt-to-EBITDA for the last 12 months ended March 31, 2024, was 9.0 times (x) (including Crombie's share of joint-venture debt).

The Positive trends reflect Morningstar DBRS’ expectations that Crombie's secured debt-to-total-debt ratio will improve to less than 40% by year-end 2024; the ratio was 43.5% as of the last 12 months ended March 31, 2024, from 49.4% in the same period a year prior, all else equal.

CREDIT RATING DRIVERS
Morningstar DBRS would consider a credit ratings upgrade should Crombie's total debt-to-EBITDA fall below 8.0x or secured debt-to-total debt ratio were to fall comfortably below 40% on a sustained basis within the next 12 months and with expectations that there are no draws on the secured credit revolving facility, all else being equal. Morningstar DBRS would consider restoring the trend to Stable if Crombie were to fail to bring secured debt-to-total debt ratio below 40% within the next 12 months, all else being equal. Morningstar DBRS would consider a credit ratings downgrade should Crombie’s total debt-to-EBITDA ratio surpass 10.3x.

FINANCIAL OUTLOOK
Morningstar DBRS anticipates Crombie's leverage measured by total debt-to-EBITDA will remain around the current levels in the low 9.0x range, given the pace of growth and stability of EBITDA and cash flows. Morningstar DBRS expects EBITDA interest coverage to remain around 2.5x. Morningstar DBRS notes that Crombie's credit ratings consider a minimal increase in debt over the next 12 to 24 months as the Trust continues to focus on going to an unsecured capital structure, thus further lowering secured debt-to-total-debt levels.

CREDIT RATING RATIONALE
The credit ratings remain supported by (1) Morningstar DBRS' view of Crombie's strategic relationship with Empire/Sobeys; (2) Crombie's stable portfolio of grocery-and pharmacy-anchored retail properties; (3) the Trust's long-term leases with favorable terms and stable cash flows; and (4) Crombie's strong geographic and property diversification. The credit ratings remain constrained by the Trust's (1) moderate financial profile; (2) exposure to smaller secondary/tertiary Canadian markets; (3) tenant and asset type concentration; and (4) development and execution risk to its large development pipeline over the next 10-15 years.

While common ownership and the strong connection between Sobeys’ and Crombie’s operations closely align their interests, Crombie’s ratings do not necessarily move in tandem with Sobeys’ ratings. Morningstar DBRS would likely leave Crombie’s credit ratings unchanged even if Sobeys’ ratings were changed.

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 Crombie Real Estate Investment Trust, the BRA factors were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of Crombie Real Estate Investment Trust, 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 Crombie Real Estate Investment Trust, 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

Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 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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