DBRS Limited (DBRS Morningstar) downgraded the Issuer Rating of CT REIT Limited Partnership (CT REIT LP) and the Senior Unsecured Debentures rating of CT Real Estate Investment Trust (the Trust; together with CT REIT LP, CT REIT) to BBB from BBB (high). All trends remain Stable. These rating actions follow the downgrade of the Issuer Rating and Medium-Term Notes rating of Canadian Tire Corporation Limited (Canadian Tire) to BBB, both with Stable trends (see DBRS Morningstar press release titled “DBRS Morningstar Downgrades Canadian Tire Corporation to BBB with a Stable Trend and Removes Ratings from Under Review with Negative Implications”). These rating actions resolve the previous Under Review With Negative Implications status.
The ratings consider DBRS Morningstar’s view that CT REIT’s credit risk profile and ratings are aligned with those of Canadian Tire largely because Canadian Tire effectively controls CT REIT through its majority ownership and is the most significant tenant of CT REIT, among other reasons. Any changes in Canadian Tire’s rating would have a direct effect on CT REIT’s ratings.
While Canadian Tire does not provide explicit support to CT REIT, DBRS Morningstar assesses the level of Canadian
Tire’s implicit support to CT REIT LP to be strong based on the following considerations:
(1) CT REIT LP is essential to the operation of Canadian Tire. CT REIT LP is Canadian Tire’s most significant landlord for the foreseeable future.
(2) There are substantial contractual arrangements between CT REIT and Canadian Tire, including long-term lease agreements, services and property management agreements.
(3) Canadian Tire’s effective ownership of CT REIT was approximately 69.3% of CT REIT’s equity as at March 31, 2020.
(4) The reputational risk implications of CT REIT to Canadian Tire are high, given their strong interconnections.
(5) Integration between Canadian Tire and CT REIT is strong through strategies, operations, and oversight.
The Trust’s Senior Unsecured Debentures rating reflects (1) a low level of prior-ranking debt (i.e., the sum of secured debt, such as mortgages, and the limit on the unsecured credit facility, including any uncommitted accordion provision, if applicable) in CT REIT’s debt structure (i.e., <40% of total debt); (2) DBRS Morningstar’s expectation that no additional unsecured debt will be issued at CT REIT LP, excluding its existing credit facility, going forward; (3) DBRS Morningstar’s expectation that future unsecured debentures will only be issued at the Trust level; and (4) the Trust’s Senior Unsecured Debentures ranking pari passu with the Class C LP units of CT REIT LP in terms of distributions and claims.
Canadian Tire’s stated intention is to remain majority unitholder of CT REIT over the long term. If Canadian Tire’s ownership or control in CT REIT diminish materially over time or if Canadian Tire no longer represents a material proportion of CT REIT’s portfolio, by size or by rent paid, CT REIT’s credit risk profile could be assessed on a stand-alone basis using DBRS Morningstar’s “Rating Entities in the Real Estate Industry” methodology. In the event that CT REIT’s credit risk profile is assessed on a stand-alone basis, DBRS Morningstar notes that CT REIT LP’s Issuer Rating and the Trust’s Senior Unsecured Debentures rating would be constrained by Canadian Tire’s rating.
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), Rating Companies in the Merchandising Industry (August 15, 2019), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 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.
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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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