DBRS Limited (DBRS Morningstar) upgraded the Issuer Rating and Senior Unsecured Debenture rating on Choice Properties Limited Partnership (CPLP) as well as the Senior Unsecured Debenture (guaranteed by CPLP) rating on Choice Properties Real Estate Investment Trust (CPREIT; together, Choice Properties) to BBB (high). All trends are Stable. Since CPLP guarantees CPREIT’s debentures, the two Senior Unsecured Debenture ratings are harmonized. The upgraded ratings on Choice Properties reflects: (1) the upgrade to the ratings on Loblaw Companies Limited’s (Loblaw’s) long-term debt to BBB (high), with a Stable trend, which effectively raised the cap on Choice Properties’ ratings (please see discussion of the cross-default provision below) and (2) the improved financial metrics and outlook that support the new higher rating.
When DBRS Morningstar changed Loblaw’s trend to Positive last October, Choice Properties’ trends remained Stable because the financial metrics then were weaker and there was some uncertainty regarding the pace and extent of deleveraging in the near to medium term.
Note that DBRS Morningstar assesses Choice Properties’ credit risk profile on a stand-alone basis since George Weston Limited (GWL; rated BBB with a Stable trend by DBRS Morningstar; confirmed September 17, 2020) completed a reorganization wherein Loblaw Companies Limited (rated BBB (high) with a Stable trend by DBRS Morningstar; upgraded September 17, 2020) transferred its 61.6% interest in Choice Properties to GWL. Notwithstanding, in DBRS Morningstar’s view, Choice Properties’ ratings are directly constrained by the cross-default provision between CPREIT and Loblaw in the credit facility that limits Choice Properties’ rating to that of Loblaw.
On a stand-alone basis, the ratings continue to be supported by Choice Properties’ strong market leadership, particularly in necessity-based retail, across Canada’s largest urban centres; strategic alliance with Loblaw; long-term lease profile with low counterparty risk, which provides underlying stability to cash flows; large, well-located portfolio of retail, industrial, and office properties; and solid financial risk profile with high interest coverage and a high level of unsecured debt in the debt structure supported by a large pool of unencumbered assets. The ratings continue to be constrained by concentration risks with a retail-focused portfolio and the majority of revenue derived from Loblaw banners; a cross-default provision in Choice Properties’ credit facility between CPREIT and Loblaw; and relatively high leverage for the rating as measured by total debt-to-EBITDA.
The Stable trends reflect DBRS Morningstar’s expectation that Choice Properties will maintain its key financial metrics at current levels (i.e., total debt-to-EBITDA of 7.6 times (x) and EBITDA interest coverage of 3.32x in the last 12 months ended June 30, 2020) on a sustained basis, all else equal, while undertaking its development and intensification program, especially in the burgeoning residential sector.
Although not currently anticipated, DBRS Morningstar may take a negative rating action on Choice Properties if DBRS Morningstar downgrades its ratings on Loblaw or if there is a broad-based weakening in the operating environment and deteriorating earnings performance that leads to material declines in EBITDA and operating cash flows as well as higher financial leverage.
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: 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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