Morningstar DBRS Confirms Credit Ratings on Granite REIT Holdings Limited Partnership at BBB (high) With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed Granite REIT Holdings Limited Partnership's (GRHLP) Issuer Rating and Senior Unsecured Debentures credit rating at BBB (high), both with Stable trends. Morningstar DBRS based the credit ratings on the credit risk profile of the combined entity, including GRHLP and its subsidiaries, as well as Granite Real Estate Investment Trust (Granite REIT or the Trust) and Granite REIT Inc. (Granite GP).

KEY CREDIT RATING CONSIDERATIONS
The confirmations take into consideration Granite's healthy operational performance for YE2024 led by stable occupancy levels and consistent same-property cash net operating income growth and modest year-over-year improvement in leverage as measured by a total debt-to-EBITDA ratio of 7.2 times (x) at YE2024, down from 7.9x the previous year. The Stable trends also consider Morningstar DBRS' expectation that Granite's operating performance will remain largely stable in the near term despite the persisting U.S./Canada tariff dispute and overall economic and geopolitical uncertainty, which Morningstar DBRS believes could cause tenants to pause on making long-term lease commitments. Morningstar DBRS believes Granite's strategically well-located, high-quality diversified portfolio will help mitigate any economic shifts caused by the tariffs. Morningstar DBRS expects Granite will continue to execute its long-term strategy of growing and diversifying its asset base through acquisitions and developments over the medium term and anticipates upcoming growth plans to be funded with a mix of cash on hand, select asset dispositions, incremental debt, and equity, similar to recent years.

CREDIT RATING DRIVERS
All else being equal, Morningstar DBRS would consider a positive credit rating action should the Trust achieve a Morningstar DBRS total debt-to-EBITDA ratio of 7.2x or better on a sustained basis, while maintaining a Morningstar DBRS EBITDA interest coverage ratio above 4.0x on a sustained basis. Conversely, Morningstar DBRS would consider a negative credit rating action should Granite's total debt-to-EBITDA ratio exceed 9.3x on a sustained basis, which would cause Morningstar DBRS to review the one-notch overlay factor applicable to the low proportion of secured debt in the debt stack.

FININCIAL OUTLOOK
Morningstar DBRS projects the total debt-to-EBITDA ratio to remain in the low-7.0x range in the near term, anticipating the Trust's limited growth and expansion plans owing to the persisting macroeconomic uncertainty. Over the medium term, Morningstar DBRS expects the total debt-to-EBITDA ratio to modestly deteriorate to the mid-7.0x range as the Trust selectively deploys capital on strategic growth opportunities and funds future growth, which will be either by way of accretive acquisitions or development with a balanced mix of debt, equity, cash on hand and select asset dispositions. Morningstar DBRS projects EBITDA interest coverage (including capitalized interest) to remain in the high-4.0x range in the near term and then modestly deteriorate to the low- to mid-4.00x range over the medium term as low-cost euro swapped debt is refinanced; however, this level of EBITDA interest coverage is still strong for the current credit rating category.

CREDIT RATING RATIONALE
The credit rating confirmation continues to be supported by Granite's (1) institutional-quality industrial real estate portfolio; (2) completely unsecured debt capital stack and sizable unencumbered asset pool; (3) financial flexibility provided by a sound balance sheet and relatively low in-place cost of debt; and (4) strong lease profile with high-quality tenants including Magna International Inc. (rated A (low) with a Stable trend) and Amazon.com, Inc. The credit ratings remain constrained by Granite's (1) lack of scale in its trade areas with a relatively geographically dispersed portfolio; (2) tenant concentration with 44.7% of annualized revenue derived from the Trust's top 10 tenants (as at December 31, 2024), including a Tier 1 global automotive supplier in Magna International Inc. and its operating subsidiaries; and (3) asset-type concentration with a portfolio solely focused on the industrial segment, despite some diversification across different industrial uses.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS   
There were no Environmental/Social/Governance factor(s) 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 GRHLP, the BRA factors were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors 
In the analysis of GRHLP, 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 GRHLP, 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 of one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025; https://dbrs.morningstar.com/research/447186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

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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