Morningstar DBRS Confirms Cominar Real Estate Investment Trust's Issuer Rating and Senior Unsecured Debentures at BB (high), Stable

DBRS Limited (Morningstar DBRS) confirmed Cominar Real Estate Investment Trust's (Cominar or the REIT) Issuer Rating and Senior Unsecured Debentures rating at BB (high) with Stable trends. The recovery rating on the Senior Unsecured Debentures is RR3. These credit rating confirmations reflect the execution of Cominar's strategy, which is generally consistent with Morningstar DBRS' expectations, as well as several further revisions to the REIT's business risk assessment (BRA), financial risk assessment (FRA), and overlay factors.

KEY CREDIT RATING CONSIDERATIONS
The Stable trends consider changes to the REIT's BRA and FRA factors, which reflect Cominar's strategic disposal of its non-core assets to repay debt, while focused on high grading the portfolio. These actions have resulted in BRA changes to asset quality, market position, diversification, and portfolio size. Asset quality has been revised modestly higher, as Morningstar DBRS believes that the REIT's retained core properties are of higher quality, generally well located in high-demand urban neighbourhoods, and expected to benefit from future densification opportunities. Morningstar DBRS' lower assessment of market position and portfolio size reflects the shrinking asset base; in Morningstar DBRS' opinion, this restricts the REIT's economies of scale and bargaining power with tenants, which could potentially affect leasing terms and occupancy rates over time. Morningstar DBRS has revised diversification lower as the current portfolio is primarily concentrated in core properties within the Greater Montreal Region, which increases exposure to regional economic fluctuations. Currently, lease maturity and tenant quality are unchanged; however, Canadian National Railway Company (CNRC; rated "A" with a Stable trend by Morningstar DBRS), Cominar's largest tenant by net operating income, announced its intention to vacate its office headquarters at the end of its lease expiry in November 2027, which potentially heightens lease rollover risk and tenant quality in the near term given the need to find a replacement tenant. Morningstar DBRS has also revised Cominar's FRA factors, namely total debt-to-EBITDA, higher because of expectations regarding the REIT's near-term deleveraging initiatives, which are offset by modest deterioration in the EBITDA-interest coverage ratio as the REIT refinances its maturing debt at the current elevated interest rates. Taken together, these BRA and FRA revisions are credit negative in nature and provide lower tolerance for leverage (i.e., total debt-to-EBITDA) for a given credit rating.

CREDIT RATING DRIVERS
Given the deterioration in BRA and the heightened CNRC lease rollover risk, Cominar has little financial flexibility remaining for the given credit rating level. Morningstar DBRS would consider negative credit rating actions should Cominar fail to execute its deleveraging initiatives in the near term such that the total debt-to-EBITDA ratio remains above 9.3 times (x) or EBITDA-interest coverage declines below 1.67x on a sustained basis, all else equal. Given the challenges pertaining to high leverage, Morningstar DBRS views positive credit rating actions as highly unlikely in the near to medium term.

FINANCIAL OUTLOOK
Morningstar DBRS has revised its expectation for Cominar's total debt-to-EBITDA to the low 9.0x range from the mid-9.0x range previously (and 11.3x for the last 12 months ended June 30, 2024 (LTM)) because of the REIT's deleveraging plans in the near term. Morningstar DBRS' expectations of lower leverage in the near to medium term also consider modest improvement in the REIT's elevated general and administrative expenses, partly due to high transaction and reorganization costs. However, in contrast to Morningstar DBRS' prior expectations, Morningstar DBRS expects Cominar's EBITDA interest coverage to fluctuate in the high 1.7x range in the near to medium term from the low 2.0x range previously (1.72x LTM) as it refinances upcoming maturing debt at the current higher interest rates.

CREDIT RATING RATIONALE
The credit ratings are supported by Cominar's above-average-quality assets with several notable properties and long-dated lease maturity profile with high-quality tenants. The credit ratings are constrained by Cominar's elevated leverage, weak geographic and property diversification, and below-average portfolio size with limited market position.

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 Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

BRA AND FRA
(A) Weighting of BRA Factors
In the analysis of Cominar, the BRA factors were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of Cominar, 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 Cominar, the BRA and the FRA carry approximately equal weight.

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 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 following criteria has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

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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