DBRS Limited (DBRS Morningstar) confirmed the rating of Granite REIT Holdings Limited Partnership’s (GRHLP) Senior Unsecured Debentures at BBB with a Stable trend. DBRS Morningstar notes that the rating is based on the credit risk profile of the combined entity, including GRHLP and its subsidiaries, as well as Granite Real Estate Investment Trust (Granite REIT) and Granite REIT Inc. (collectively, Granite or the Trust).
The confirmation takes into consideration the ongoing Coronavirus Disease (COVID-19) pandemic and consequent economic slowdown, which DBRS Morningstar believes Granite is relatively well positioned for because of (1) the financial flexibility provided by a sound balance sheet and continued low cost of debt as evidenced by recent refinancing of Granite’s $300.0 million term loan maturing December 11, 2026, and USD 185.0 million term loan maturing December 19, 2024, which were swapped into euro-denominated fixed-rate payments at 1.355% and 0.522%, respectively; (2) additional source of funds with zero secured debt in its capital structure, resulting in a large pool of unencumbered assets valued at $4.5 billion at December 31, 2019 ($2.5 billion modern warehouse exposure), that could be pledged as security for mortgage loans; and (3) Granite’s strong lease profile with long-term leases with high-quality tenants including Amazon, notwithstanding concentrated exposure to a Tier 1 global automotive supplier in Magna International Inc. (confirmed A (low) with a Stable trend by DBRS Morningstar on June 26, 2019) and its operating subsidiaries (together, Magna). DBRS Morningstar understands the automotive industry is facing significant headwinds resulting from the coronavirus pandemic. The rating continues to be constrained by (1) Granite’s lack of scale in its trade areas with a relatively small and geographically dispersed portfolio, (2) tenant concentration with 68% of annualized revenue derived from the Trust’s top 10 tenants (as at December 31, 2019), (3) asset-type concentration with a portfolio solely focused on the industrial segment, and (4) consideration for structural subordination from GRHLP’s intermediate holding and operating company subsidiaries.
The Stable rating outlook takes into consideration (1) Granite’s continued strong progress toward executing its strategic initiatives in 2019, including investing $960.4 million into acquisitions of modern assets in key e-commerce and distribution markets, with further contractual commitments of $129.5 million to close in 2020 and 2021 and two equity-bought deal offerings to partially fund aforementioned growth capital expenditures ($525 million combined gross proceeds); (2) improving tenant and property diversification as Magna exposure is reduced to 42% of annualized rental revenue through a combination of growth and dispositions resulting in reduced tenant and property concentration, and (3) DBRS Morningstar’s expectation that total debt-to-EBITDA will be in the 6 times (x) range through 2021 (5.6x at the last 12 months ending December 31, 2019) in light of Granite's continued execution of its strategic initiatives.
DBRS Morningstar would consider a positive rating action should Granite successfully demonstrate its ability to manage through the anticipated economic slowdown related to the coronavirus pandemic while maintaining key financial risk metrics at levels commensurate with the rating and continue to demonstrate balanced treatment between shareholders and debtholders in the ongoing funding of its growth plans. Alternatively, DBRS Morningstar would consider a negative rating action should total debt-to-EBITDA increase above 8.5x, combined with material deterioration in EBITDA interest coverage, on a sustained basis.
DBRS Morningstar views the ongoing coronavirus pandemic as a Social risk under DBRS Morningstar's ESG analytical framework. The coronavirus pandemic and resultant economic slowdown, in conjunction with the energy bear market and financial market disruption, are unprecedented and thusly contributing to a heightened level of uncertainty and putting added stress across many sectors DBRS Morningstar covers, including the commercial real estate industry. While some property types within Granite's portfolio may be adversely impacted by the coronavirus pandemic, such as special purpose/heavy manufacturing, depending on the severity, DBRS Morningstar anticipates modern warehouse properties in particular may benefit as society is further pressured toward e-commerce channels as a result of social distancing and restrictions on the movement of people.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Entities in the Real Estate Industry, DBRS Morningstar Criteria: Guarantees and Other Forms of Support, and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships, which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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 email@example.com.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
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