Morningstar DBRS Confirms Dream Summit Industrial LP's Issuer Rating and Senior Unsecured Debentures at BBB, Stable

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and Senior Unsecured Debentures credit rating of Dream Summit Industrial LP (Dream Summit or the Company) at BBB with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
The confirmation of the Stable trends considers the changes Morningstar DBRS has made to Dream Summit's business risk assessment (BRA), specifically its market position, which has been revised upward, and its financial risk assessment (FRA), which has been revised downward, since the previous rating action dated February 2, 2024. Market position has been revised modestly higher, reflecting the continued growth in the Company's portfolio and Dream Summit's benefitting from its strategic partnership with Dream Industrial REIT (rated BBB with Stable trend by Morningstar DBRS), leveraging the latter's expertise in leasing and property management to enhance its own operational performance. The confirmation of the credit rating is also supported by Dream Summit's strong operational performance with a healthy same-property net operating income (NOI), year-over-year growth underpinned by a portfolio of average-quality industrial properties with a strong mark-to-market potential, and successful execution of its acquisition-led growth strategy since its inception. As a result, the Company's leverage, as measured by total debt-to-EBITDA, has modestly improved to 8.4 times (x) as at June 30, 2024, from 9.3x at YE2023. However, the modest improvement in the BRA is partially offset by a slightly lower assessment of the Company's FRA, specifically Dream Summit's leverage as measured by total-debt-to-EBITDA. Leverage is now expected to increase to the low 9.0x range in the near to medium term as Morningstar DBRS anticipates Dream Summit will continue to pursue its acquisition-led growth strategy, largely funded by additional unsecured debt. Morningstar DBRS also expects Dream Summit's coverage, as measured by EBITDA-to-interest coverage, to deteriorate to the low 3.0x range, in line with its prior expectations, because of the greater cost of debt financing amid the higher interest-rate environment.

CREDIT RATING DRIVERS
Morningstar DBRS would consider a positive rating action should Dream Summit's total debt-to-EBITDA decline below 9.2x on a sustained basis, all else equal. Morningstar DBRS would consider a negative rating action should the FRA deteriorate to non-investment grade, including EBITDA-to-interest coverage below 3.0x, or if Dream Summit reverses course on the progress made in unencumbering its balance sheet (i.e., its low secured debt-to-total debt ratio).

FINANCIAL OUTLOOK
Morningstar DBRS expects total debt-to-EBITDA to be in the low 9.0x range in the near to medium term, driven by assumptions of a largely debt-funded acquisition strategy partially offset by continued EBITDA growth from same-store NOI growth and additional revenue from recent acquisitions.

Morningstar DBRS projects EBITDA-to-interest coverage metrics to weaken and fluctuate in the low 3.00x range in the near to medium term primarily as a result of the greater cost of debt as the Company continues to grow its portfolio. Morningstar DBRS does not currently factor into its leverage expectations the possibility that Dream Summit could receive equity contributions from its well-capitalized ultimate shareholders, GIC (Realty) Private Limited and Dream Industrial REIT.

CREDIT RATING RATIONALE
The credit rating confirmations are supported by the Company's (1) predominately unsecured debt structure with a secured debt-to-total debt ratio below 40% (26.4% as at June 30, 2024); (2) adequate-quality assets that should provide average cash flow stability; (3) superior property and tenant diversification, and (4) strong operating performance and successful accretive acquisition strategy. Relative to Morningstar DBRS' real estate coverage universe, the credit ratings are constrained by (1) a below-average portfolio size as measured by EBITDA, notwithstanding continued robust growth in the near to medium term; (2) weak asset-type diversification as a pure play in the light-industrial segment; and (3) below-average tenant quality.

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 Dream Summit, the BRA factors were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of Dream Summit, 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 Dream Summit, 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 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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