Morningstar DBRS Confirms Artis Real Estate Investment Trust's Issuer Rating and Senior Unsecured Debentures Rating at BBB (low) With Negative Trends

DBRS Limited (Morningstar DBRS) confirmed Artis Real Estate Investment Trust's (Artis or the REIT) Issuer and Senior Unsecured Debentures ratings at BBB (low) and its Preferred Trust Units rating at Pfd-3 (low), all with Negative trends.

KEY CREDIT RATING CONSIDERATIONS
The Negative trends reflect the REIT's weakened market position and portfolio size following its sizeable dispositions during the past 12 months. Morningstar DBRS' lower assessment of market position and portfolio size reflects the REIT's shrinking asset base; in Morningstar DBRS' opinion, this restricts the REIT's economies of scale. Morningstar DBRS has also upwardly revised Artis' financial risk assessment (FRA) factors, namely total debt-to-last 12 months (LTM) EBITDA, because of the expectations of lower leverage in the near-to-medium term following the REIT's recent deleveraging initiatives . Artis' leverage has now improved to 7.0 times (x) as at September 30, 2024, from 9.2x the previous year; however, it is offset by a modest deterioration in the EBITDA-interest coverage ratio as the REIT continues to refinance its maturing mortgage debt at modestly elevated interest rates. Taken together, the changes in business risk assessment (BRA) and FRA are credit negative in nature and thus provide no flexibility in the current credit rating category. However, Artis' overall weakened core assessment is mitigated by the REIT's increased access to liquidity on its new senior secured credit facilities and the short duration of its outstanding Series E Senior Unsecured Debentures.

Morningstar DBRS understands that the available liquidity is sufficient to repay the outstanding Series E Senior Unsecured Debentures, assuming Artis will redeem these debentures at or before their maturity on April 29, 2025, and no further Senior Unsecured Debentures will be issued in the interim. The credit rating thus benefits from this uplift. As of December 16, 2024, Morningstar DBRS understands that the available liquidity on the new three-year senior secured credit facilities was approximately $282 million ($17 million in cash plus $265 million available on its credit facilities) relative to the outstanding Series E Senior Unsecured Debentures of $200 million.

CREDIT RATING DRIVERS
All else equal, Morningstar DBRS would consider downgrading Artis should 1) Artis' liquidity position deteriorate and it fails to successfully redeem the Series E Senior Unsecured Debentures at or before its maturity or 2) should Artis' EBITDA-interest coverage fail to improve above 2.0x or better on a sustained basis, or should the Morningstar DBRS total debt-to-EBITDA not improve to 6.7x or better on a sustained basis in the near term. Given the deterioration in the REIT's BRAs and constrained financial flexibility, Morningstar DBRS currently does not anticipate any positive credit rating actions in the near to medium term.

FINANCIAL OUTLOOK
Morningstar DBRS expects Artis' leverage to modestly deteriorate and fluctuate in the low-to-mid 8x range from 7.0x as at September 30, 2024, because of the loss of EBITDA from recent asset sales and expectations of increase in debt in the near term as the REIT uses the new senior secured credit facilities to redeem the Series E Senior Unsecured Debentures. Similarly, EBITDA-interest coverage is expected to fluctuate in the 1.4x range because of the REIT's shrinking EBITDA and efforts to refinance existing mortgages at slightly elevated interest rates.

CREDIT RATING RATIONALE
The credit rating confirmation is supported by (1) Artis' well-diversified, albeit reduced, income-producing portfolio; (2) strong tenant and property diversification; and (3) available liquidity on the new senior secured credit facilities. The credit rating is constrained by (1) Artis' weak interest coverage; (2) lack of scale in any markets where it operates; and (3) the smaller portfolio size on EBITDA basis relative to the BBB (low) credit rating category.

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

(B) Weighting of FRA Factors
In the analysis of Artis, 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 Artis, the BRA factors carried greater weight than the FRA factors.

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/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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