Morningstar DBRS Confirms SmartCentres Real Estate Investment Trust's Credit Ratings at BBB With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed SmartCentres Real Estate Investment Trust's (SmartCentres or the Trust) Issuer Rating and Senior Unsecured Debentures credit rating at BBB and with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
The Stable trends reflect the strong operational performance of SmartCentres' Walmart Inc.-anchored value-oriented retail portfolio and modestly improving leverage metrics relative to Morningstar DBRS' prior-year expectations. Morningstar DBRS expects SmartCentres' leverage (as measured by total debt-to-EBITDA) to slightly improve to the low 10 times (x) range from the previous year's expectation of the mid- to high 10.0x range by YE2025 supported by the Trust's higher rental income, mainly driven by expectations of steady same-property net operating income growth and incremental revenue generated through stabilized and ongoing development projects. Concurrently, Morningstar DBRS' improved outlook on leverage also factors in a marginally improved outlook surrounding the Trust's capital-recycling initiatives, as an improving interest rate environment should support transaction activity in the near to medium term.

CREDIT RATING DRIVERS
Morningstar DBRS would consider a positive credit rating action should SmartCentres' total debt-to-EBITDA improve to below 9.2x and EBITDA-interest coverage improve to above 2.7x on a sustained basis, all else being equal. Morningstar DBRS would consider taking a negative credit rating action if SmartCentres' total debt-to-EBITDA ratio deteriorates to above 10.8x and EBITDA-interest coverage deteriorates to below 2.3x on a sustained basis.

FINANCIAL OUTLOOK
Morningstar DBRS anticipates that SmartCentres' leverage, as measured by total debt-to-EBITDA, will fluctuate in the low 10x range by YE2025 through the Trust's organic growth, driven by strong occupancy levels, sustained new and existing lease renewals at higher rental rates, and income from recently completed and near-term developments. Morningstar DBRS expects EBITDA-interest coverage to fluctuate at the current low to mid-2x range in the near to medium term.

CREDIT RATING RATIONALE
The credit ratings continue to be supported by SmartCentres' (1) strong tenant profile, with Walmart Inc. representing 23.4% of annualized rental revenue at September 30, 2024; and (2) predominantly unsecured debt capital stack with a secured debt-to-total debt ratio of 17.4% at September 30, 2024, and sizable unencumbered asset pool ($9.4 billion), which together warrant a one-notch uplift to SmartCentres' stand-alone credit assessment.

However, the credit ratings continue to be constrained by (1) elevated leverage as measured by the Trust's total debt-to-EBITDA ratio; (2) concentration risks, such as asset-type concentration in retail, tenant concentration (most significantly Walmart), and geographic concentration in the Greater Toronto Area; and (3) modest development execution risks, which may increase volatility of cash flows and metrics.

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.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of SmartCentres, the BRA factors were considered in the order of importance contemplated in the methodology.

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