DBRS Limited (DBRS Morningstar) confirmed the rating of Crombie Real Estate Investment Trust’s (Crombie or the Trust) Senior Unsecured Debentures at BBB (low) with a Stable trend. The confirmation reflects DBRS Morningstar’s expectation for Crombie's key financial metrics (total debt-to-EBITDA of 9.7 times (x) as at last 12 months Q1 2020, and EBITDA interest coverage of 2.44x as at Q1 2020) to weaken in 2020 from the ongoing effects of the Coronavirus Disease (COVID-19) pandemic, the Trust's continued focus on improving portfolio quality through property dispositions, and Crombie executing its active major development program. DBRS Morningstar expects this to be followed by a return to a more normal operating environment and improved earnings as a result of contributions from newly completed major developments. The confirmation also considers DBRS Morningstar’s expectation that the long-term nature of Crombie’s leases, combined with built-in contractual rental rate increases in the majority of its leases, should provide stability and predictability to cash flow and good protection from unfavourable changes in market conditions.
Crombie’s management expects to invest $100 million annually, on average, in its strategic Empire Company Limited (Empire)/Sobeys Inc. (Sobeys; rated BBB (low) with a Stable trend by DBRS Morningstar) relationship via property acquisitions and capital investments in existing Sobeys-anchored properties and to continue to fine-tune its portfolio to reduce its investment in non-core and lower-growth properties to fund growth initiatives. Crombie has embarked on a major development program with an estimated investment potential of up to $5.8 billion over the next 10 years to 15 years. DBRS Morningstar believes development will be the main growth driver in the future. Although there are risks associated with property development, DBRS Morningstar expects Crombie to reduce these risks by completing the developments in phases and, in certain cases, with experienced development partners. Six near-term active development projects have the potential to add up to 255,000 square feet of commercial gross leasable area and up to 1,200 residential rental units by 2021. These six near-term development projects are forecast to cost around $600 million and could potentially contribute incremental annual net operating income of between $33.8 million and $36.3 million, at Crombie’s share, upon completion and stabilization.
A negative rating action could result from weaker operating and earnings performance that leads to higher financial leverage, such that debt-to-EBITDA rises above 10.0x or EBITDA interest coverage falls below 2.34x on a sustained basis. A positive rating action would likely be the result of improved asset quality and diversification and a decrease in financial leverage such that debt-to-EBITDA falls below 8.0x or EBITDA interest coverage rises above 3.00x on a sustained basis.
While common ownership and the strong connection between Sobeys’ and Crombie’s operations closely align their interests, Crombie’s rating does not necessarily move in tandem with Sobeys’ ratings. Should Sobeys’ ratings be upgraded to BBB, it is likely that DBRS Morningstar would maintain Crombie’s rating at BBB (low).
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 (April 23, 2019), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 1, 2019), 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.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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