Morningstar DBRS Changes First Capital Real Estate Investment Trust’s Trends to Positive From Stable and Confirms Credit Ratings at BBB

DBRS, Inc. (Morningstar DBRS) changes First Capital Real Estate Investment Trust’s (First Capital or the Trust) trends to Positive from Stable and confirms the Issuer Rating and Senior Unsecured Debentures rating at BBB.

KEY CREDIT RATING CONSIDERATIONS
The Positive trends reflect First Capital’s improvement on its financial risk assessment metrics. As of the last twelve months (LTM) ended March 31, 2024, First Capital’s total debt-to EBITDA was at 9.9 times (x) and EBITDA interest coverage was at 2.42x, from 10.8x and 2.20x, respectively a year prior. Morningstar DBRS expects First Capital total debt-to EBITDA to continue to improve in the low-9.0x, all else equal.

The credit ratings reflect First Capital’s strong operating results in First Capital’s high-quality, grocery-anchored and mixed-use properties in neighborhoods with strong demographics and the Trust’s continued progress on high grading its portfolio through its ongoing redevelopment/development initiatives. The rating confirmations also consider First Capital’s continued execution on its’ dispositions of low-yielding assets through 2024.

CREDIT RATING DRIVERS
Morningstar DBRS would consider a credit ratings upgrade should First Capital’s total debt-to-EBITDA continue to improve in the low 9.0x in the next 12 months and remain so, all else being equal. Morningstar DBRS would consider restoring the trend to Stable if total debt-to-EBITDA were to deteriorate to above 10.0x on a sustained basis, all else being equal.

FINANCIAL OUTLOOK
Morningstar DBRS anticipates First Capital’s leverage measured by total debt-to-EBITDA will improve to the low 9.0x range, given the Trust’s continued execution of its dispositions plan and First Capital’s pace of growth and stability of EBITDA and cash flows. Morningstar DBRS expects EBITDA interest coverage to remain around current levels at around 2.4x.

CREDIT RATING RATIONALE
The credit ratings remain supported by (1) First Capital’s large unencumbered asset pool of high-quality portfolio of grocery- and pharmacy-anchored retail properties (unencumbered assets with an IFRS value of approximately $6.0 billion) ; (2) First Capital’s strong market position in its core trade areas through ownership in property assemblies within neighborhoods and resultant low property concentration risk; and (3) the Trust's highly resilient tenant base. The credit ratings remain constrained by the Trust's (1) moderate financial profile; (2) asset type concentration as a virtually pure-play retail with some diversification by format and category; and (3) First Capital’s development and execution risk to its large development pipeline over the next 10 years.

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 First Capital 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 First Capital 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 First Capital 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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