Morningstar DBRS Confirms Choice Properties Limited Partnership and Choice Properties Real Estate Investment Trust at BBB (high) With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and Senior Unsecured Debenture credit rating of Choice Properties Limited Partnership (CPLP) as well as the Senior Unsecured Debenture (guaranteed by CPLP) credit rating of Choice Properties Real Estate Investment Trust (CPREIT; together, Choice Properties) at BBB (high). All trends are Stable. Morningstar DBRS assesses the credit ratings on a consolidated credit basis since CPLP guarantees CPREIT's Senior Unsecured Debentures.

KEY CREDIT RATING CONSIDERATIONS
The Stable trends reflect the steady execution of Choice Properties strategy, including its development and intensification program, and capital recycling initiatives, the current interest rate environment and Morningstar DBRS' resultant expectation that Choice Properties will maintain its key financial metrics near current levels, albeit with a modest decline in EBITDA interest coverage, consistent with Morningstar DBRS' prior expectation (i.e., total debt-to-EBITDA in the mid 7.0 times (x) range and EBITDA interest coverage around 3.20x).

CREDIT RATING DRIVERS
Morningstar DBRS may consider positive credit rating actions on Choice Properties if it continues to see incremental improvement in Choice Properties' business risk assessment factors, including asset quality, market position, and diversification. Conversely, Morningstar DBRS may consider negative credit rating actions on Choice Properties if its total debt-to-EBITDA ratio exceeds 8.7x and its EBITDA interest coverage ratio declines to less than 2.7x, on a sustained basis, all else equal.

FINANCIAL OUTLOOK
In the near to medium term, Morningstar DBRS expects Choice Properties' total Debt-to-EBITDA to remain near current levels (7.6x for the last 12 months ending June 30, 2024 (LTM)), notwithstanding excess cash on the balance sheet as of June 30, 2024, which Morningstar DBRS understands a portion of which will be used to repay the upcoming $550 million 3.556% Series K Senior Unsecured Debentures maturing on September 9, 2024. Morningstar DBRS expects Choice Properties' EBITDA interest coverage metric will decline from 3.51x LTM to the low 3.0x-range in the near to medium term. Morningstar DBRS anticipates that Choice Properties development and intensification program and acquisitions will be funded with a combination of debt and proceeds from dispositions. EBITDA growth will continue to be supported by development completions, and rental rate increases. Interest expense will continue to grow commensurate with growth in outstanding indebtedness, and as maturing debts are refinanced at prevailing higher rates.

CREDIT RATING RATIONALE
The credit ratings continue to be supported by Choice Properties' (1) strong market leadership, particularly in necessity-based retail, across Canada's largest urban centres; (2) strategic alliance with Loblaw Companies Limited (Loblaw; rated BBB (high) with a Stable trend by Morningstar DBRS); (3) long-term lease profile with low counterparty risk, which provides underlying stability to cash flows; (4) large, well-located portfolio of retail, industrial, mixed use residential and office properties; and (5) solid financial risk profile with high interest coverage and a high level of unsecured debt in the debt structure supported by a large pool of unencumbered assets. The credit ratings continue to be constrained by (1) concentration risks with a retail-focused portfolio and the majority of revenue derived from Loblaw banners and (2) relatively high leverage for the credit rating as measured by total debt-to-EBITDA.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors 
In the analysis of Choice Properties, the BRA factors were considered in the order of importance contemplated in the methodology.
 
(B) Weighting of FRA Factors 
In the analysis of Choice Properties, 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 Choice Properties, 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 credit ratings may use of 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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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