Morningstar DBRS Downgrades Artis Real Estate Investment Trust to BB (high) From BBB (low), Changes Trend to Stable From Negative, Discontinues Ratings on Senior Unsecured Debentures and Preferred Trust Units

DBRS Limited (Morningstar DBRS) downgraded the Issuer Rating of Artis Real Estate Investment Trust (Artis or the REIT) to BB (high) from BBB (low) and changed the trend to Stable from Negative.

Concurrently, Morningstar DBRS discontinued the credit rating on Artis' Senior Unsecured Debentures following the repayment of the outstanding Series E Senior Unsecured Debentures (the Series E Debentures) and discontinued and withdrew the credit rating on the REIT's Preferred Trust Units.

KEY CREDIT RATING CONSIDERATIONS
The credit rating downgrade reflects the loss of the temporary uplift given to the REIT's short-term liquidity position by the redemption of its Series E Debentures. Morningstar DBRS acknowledges that Artis successfully repaid the Series E Debentures using its senior secured credit facilities as of April 29, 2025. With the Series E Debentures repaid and no additional Senior Unsecured Debentures remaining, the credit rating no longer benefits from this uplift, thereby eliminating any flexibility within the rating category, as detailed in the Morningstar DBRS press release dated December 24, 2024, and supporting the credit rating downgrade. Morningstar DBRS also notes that, with a fully secured debt stack, the REIT's Issuer Rating now aligns with the senior secured debt.

Furthermore, the Stable trend acknowledges the REIT's current leverage position, with a total debt-to-EBITDA ratio of 7.3 times (x) as of December 31, 2024, improved from 10.7x the previous year, driven by sizable asset sales that were used primarily for debt repayment during 2024. However, this is offset by a weak EBITDA-interest coverage ratio related to a shrinking asset base and higher refinancing costs.

Morningstar DBRS notes a modest deterioration in the REIT's geographic and property diversification following the asset sales in 2024. Morningstar DBRS also notes that Artis' reduced portfolio size and lack of scale continue to constrain its market position, limiting economies of scale.

CREDIT RATING DRIVERS
Morningstar DBRS would consider a negative credit rating action should (1) the REIT's total debt-to-EBITDA ratio increase above 9.2x and EBITDA-interest coverage ratio remain below 1.33x on a sustained basis, all else equal, or (2) the downward pressure on the REIT's business risk assessment increase.

Morningstar DBRS would consider a positive rating action should the REIT's total debt-to-EBITDA ratio remain at 7.3x or better on a sustained basis, and EBITDA-interest coverage ratio improve above 1.83x or better on a sustained basis, all else equal.

FINANCIAL OUTLOOK
Morningstar DBRS' financial outlook for the REIT remains consistent with the previous review. Morningstar DBRS expects Artis' leverage to deteriorate modestly and fluctuate in the low- to mid-8x range from 7.3x at YE2024, because of the loss of net operating income from further asset sales, following the $972.9 million in dispositions in 2024, as the REIT continues its business transformation plan. Similarly, the EBITDA-interest coverage ratio is expected to remain constrained 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 rating is supported by (1) Artis' modestly diversified, though reduced in size, income-producing portfolio; (2) continued tenant diversification; and (3) improved leverage. The rating is constrained by (1) weak interest coverage, (2) diminished scale in the REIT's operating markets, and (3) smaller portfolio size.

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 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 (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 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.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings.

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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