DBRS Limited (DBRS Morningstar) assigned a provisional Issuer Rating and a provisional Senior Unsecured Debentures rating to Summit Industrial Income Real Estate Investment Trust (Summit or the REIT) of BBB (low), both with Stable trends. As of September 8, 2020, Summit had no Senior Unsecured Debentures outstanding; if Summit issues Senior Unsecured Debentures in the future, DBRS Morningstar expects the issuance to be on terms and conditions consistent with market practice and satisfactory to DBRS Morningstar, including guarantees consistent with Summit’s unsecured revolving credit facility.
The ratings consider the ongoing Coronavirus Disease (COVID-19) pandemic and related public health measures, which DBRS Morningstar believes Summit is relatively well positioned to handle in light of its exposure to robust industrial real estate fundamentals, particularly in the Greater Toronto Area, and improving financial flexibility and access to capital markets as it transitions to an unsecured debt stack, unlocking a sizable unencumbered asset pool. The ratings are supported by (1) adequate-quality assets that should provide average cash flow stability; (2) superior property and tenant diversification; (3) a well-laddered lease maturity profile; and (4) strong interest coverage for the ratings as measured by earnings before interest, taxes, depreciation, and amortization (EBITDA) interest coverage in the 3.0 times (x) range. The ratings are constrained by (1) high leverage as reflected in DBRS Morningstar’s expectations for total debt-to-EBITDA in the 9.0x range, which is a material improvement from total debt-to-EBITDA of 10.9x for the last 12 months ended June 30, 2020 (LTM 2020); (2) a below-average portfolio size as measured by EBITDA of $116.9 million at LTM 2020; (3) weak asset-type diversification as a pure play in the light-industrial segment; and (4) below-average tenant quality relative to DBRS Morningstar’s real estate coverage universe with a broad range of smaller unrated tenants operating in light manufacturing/assembly, distribution, and logistics.
The Stable trends reflect Summit's $170 million equity raise in August and DBRS Morningstar's expectations for significant growth in EBITDA to approximately $140 million by YE2021, largely as a result of recent property acquisitions. DBRS Morningstar expects that EBITDA growth will help to drive material improvement in key credit metrics, particularly total debt-to-EBITDA in the low-9.0x to high-8.0x range. DBRS Morningstar's YE2021 EBITDA expectations do not incorporate material negative impacts from the coronavirus on Summit's operations.
DBRS Morningstar could take a negative rating action if leverage does not improve as expected, such that total debt-to-EBITDA remains above 9.8x on a sustained basis, all else equal. DBRS Morningstar would consider a positive rating action if Summit's total debt-to-EBITDA ratio improves below 7.8x 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), and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), 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 firstname.lastname@example.org.
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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