Morningstar DBRS Changes Canadian Core Real Estate LP's Trends to Positive from Stable and Confirms Issuer and Senior Unsecured Notes Credit Ratings at A (low)

DBRS Limited (Morningstar DBRS) confirmed Canadian Core Real Estate LP's (CCRE or the Fund) Issuer Rating and Senior Unsecured Notes rating at A (low) and changed trends to Positive from Stable.

KEY CREDIT RATING CONSIDERATIONS
The Positive trends reflect CCRE's continued progress in growing its portfolio and transitioning toward a predominantly unsecured debt stack, all the while maintaining a solid financial risk assessment profile. CCRE's recent successful execution of its Tranche 5 transaction in November 2024, with QuadReal Property Group, a two-part transaction involving the acquisition of an interest in 39 predominantly residential land lease and retail assets for approximately $800 million and the divestment of interests in four assets for approximately $175 million funded in part by way of the $250 million issuance of Series 2 Senior Unsecured Notes (Tranche 5) resulted in increased visibility toward a largely unsecured funding model and a modest downward revision to CCRE's Business Risk Assessment (BRA), namely Asset Quality. Morningstar DBRS expects CCRE will continue to make progress transitioning to a predominately unsecured debt stack, achieving a secured debt-to-total debt ratio of less than 40% next year from 56% pro forma Tranche 5. CCRE's financial profile is further supported by low leverage, strong coverage, robust coverage of unsecured debt by its quality portfolio of unencumbered assets and solid access to liquidity by way of undrawn $350 million revolving credit facility. On the other hand, Asset Quality has been revised modestly lower due to the shifting mix of the Fund's portfolio from trophy urban assets to exurban land lease assets, notwithstanding the inherent cash flow stability derived from the land lease portfolio. Morningstar DBRS also recognizes that as CCRE's portfolio continues to grow, there could be improvement to its BRA factors, such as diversification.

CREDIT RATING DRIVERS
Morningstar DBRS would consider a credit ratings upgrade should (1) CCRE successfully transition to a predominately unsecured debt stack with a sizable pool of quality unencumbered assets such that secured debt-to-total debt is comfortably below 40% on a sustained basis, all else equal or if (2) CCRE's business risk assessment (BRA) improves in the near-to-medium term. Conversely, Morningstar DBRS would consider restoring the trends if CCRE LP fails to demonstrate progress toward attaining a secured debt-to-total debt ratio comfortably below 40% on a sustained basis, all else equal.

FINANCIAL OUTLOOK
The Positive trend considers Morningstar DBRS' expectation for total debt-to-EBITDA to fluctuate in the low 5.0 times (x) in the near-to-medium term given the Fund's continued pace of growth and stability of EBITDA and cash flows. Similarly, EBITDA interest coverage is expected to fluctuate in the mid-to-high 5.0x range in the near-to-medium term. This improved outlook relative to Morningstar DBRS' prior rating action is supported by consistent portfolio EBITDA growth supported by strong occupancy rates and stable new leasing and renewal led growth particularly from the industrial and residential subsectors, and from CCRE's demonstrated access to equity capital as it balances growth funding sources.

CREDIT RATING RATIONALE
The ratings continue to be supported by (1) the Fund's high-quality real estate portfolio with meaningful exposure to all primary core real estate subsectors and some exposure to alternative subsectors; and (2) a superior market position because of the Fund's ability to leverage its strategic relationship with BCI (British Columbia Investment Management Corporation's (BCI; rated AAA with Stable trends by Morningstar DBRS) and QuadReal. The ratings are principally constrained by a relatively small and more concentrated portfolio for the current rating category with EBITDA anticipated to be in the mid-$200 million range in the near term ($202.1 million for the last 12 months ended September 30, 2024), which contributes to (1) somewhat high concentration in office, comprising approximately 33% of total Portfolio Net Operating Income (NOI) (pro forma Tranche 5); (2) some concentrated exposure to Calgary Office market; and (3) high property concentration with the top 10 properties contributing 43% of Total Portfolio NOI (pro forma Tranche 5).

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or 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 CCRE, the BRA factors were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of CCRE, 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 CCRE, 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

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/397223.

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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