DBRS Limited (DBRS Morningstar) confirmed First Capital Real Estate Investment Trust’s (First Capital or the Trust) Issuer Rating and Senior Unsecured Debentures rating at BBB with Stable trends. The confirmations and Stable trends consider the impact of the Coronavirus Disease (COVID-19) pandemic, government response thereto, and consequent economic slowdown. DBRS Morningstar views First Capital as well positioned within the current rating category, notwithstanding elevated leverage (measured by total debt-to-EBITDA of 11.5 times (x) in the last 12 months ended March 31, 2020 (LTM), or net debt-to-EBITDA of 10.7x after considering $253.3 million of cash on hand) and near-term challenges related to the coronavirus, which will serve to limit First Capital’s ability to lower leverage. As a result, DBRS Morningstar expects total debt-to-EBITDA and EBITDA interest coverage to remain near current levels through 2021. DBRS Morningstar does not anticipate deterioration in the strength and stability of First Capital’s assets, particularly as the Trust continues to execute its super-urban strategy.
The Stable trends reflect First Capital’s (1) progress toward executing its super-urban strategy and disposing of noncore assets (nearly $1.0 billion sold in the LTM), which provide a source of funds for its active development pipeline, strategic acquisitions, and debt reduction; (2) ample access to liquidity with $627.4 million available on credit lines and $253.3 million in cash and cash equivalents ($880.7 million combined) at March 31, 2020; (3) manageable maturities of unsecured debt in the next 18 months ($175.0 million 5.60% Series M Senior Unsecured Debentures matured on April 30, 2020, which were redeemed with cash on hand after March 31, 2020); and (4) financial flexibility afforded by its large pool of quality unencumbered assets with an IFRS value of approximately $7.2 billion, providing 1.8x coverage of unsecured debt (assuming that credit lines are fully drawn).
First Capital’s strong market position in its core trade areas through ownership in property assemblies within neighbourhoods; resultant low property concentration risk; highly resilient tenant base; and, most importantly, high-quality portfolio of grocery- and pharmacy-anchored retail properties generating relatively stable income, despite the coronavirus, continue to support the ratings. First Capital’s April rent collection was 74% of gross rents payable as of May 5, 2020, as local ordinances forced many of the Trust’s tenants to close, which may have negatively affected their ability to pay rent, particularly small businesses that may qualify for the Canada Emergency Commercial Rent Assistance program.
Elevated leverage continue to constrain the ratings. DBRS Morningstar believes that disposition activity and development completions will slow as a result of the coronavirus, which may hamper First Capital’s ability to reduce leverage on a total debt-to-EBITDA basis. Additional constraining factors include deterioration in EBITDA interest coverage (2.24x in the LTM) and asset type concentration as the Trust is virtually a pure-play retail real estate investment trust, notwithstanding diversification by format (i.e., enclosed shopping centre, strip centre, street front, mixed-use, etc.) and category (i.e., necessity based, service oriented, discretionary, etc.).
DBRS Morningstar would consider a positive rating action if First Capital successfully executes its super-urban strategy in a credit-accretive way, such that total debt-to-EBITDA declines below 9.8x and EBITDA interest coverage (including capitalized interest) increases above 2.38x on a sustained basis, all else equal. A negative rating action could occur if First Capital’s operating environment deteriorates further, such that total debt-to-EBITDA increases above 12.8x on a sustained basis, all else equal.
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 (June 4, 2020), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), 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.
DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at firstname.lastname@example.org.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at email@example.com.
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577