DBRS Morningstar Assigns Provisional Rating of Pfd-2 (low) to Real Estate & E-Commerce Split Corp., Preferred Shares

DBRS Limited (DBRS Morningstar) assigned a provisional rating of Pfd-2 (low) to the Preferred Shares to be issued by Real Estate & E-Commerce Split Corp. (the Company), which will be managed by Middlefield Limited (the Manager). Middlefield Capital Corporation (the Investment Advisor) will provide investment management advice to the Company. The Company will issue the Preferred Shares and Class A Shares at an issue price of $10.00 per Preferred Share and $15.00 per Class A Share. The Preferred Shares and the Class A Shares will be issued on the basis that an equal number of Preferred Shares and Class A Shares will be outstanding at all times. Thus, one Preferred Share and one Class A Share will comprise one unit (the Unit). The Maturity Date will be on December 31, 2025. The term of the Company may be extended beyond the redemption date for additional terms of five years each as determined by the Company’s board of directors.

The Preferred Shares will be entitled to fixed quarterly cumulative preferential cash distributions of $0.13125 (or $0.525 annually) per share, representing a 5.25% per-annum return on the issue price of $10.00. Holders of the Class A Shares will receive regular monthly non-cumulative distributions targeted to be $0.1 (or $1.2 annually) per Class A Share to yield 8.00% per annum on the issue price of $15.00.

The Company will use the net proceeds from the offering to invest in a portfolio composed of dividend paying securities (the Portfolio) of issuers operating in the real estate or related sectors, including real estate investment trusts that the Investment Advisor believes are well positioned to benefit from low interest rates, the rapid adoption of e-commerce, and the growth of data infrastructure (the Real Estate & E-Commerce Issuers). The indicative Portfolio includes securities from 15 mostly investment-grade Real Estate & E-Commerce Issuers. The Portfolio will be actively managed in accordance with the Company’s investment objectives, strategy, and restrictions.

The Portfolio may include securities denominated in currencies other than the Canadian dollar, exposing the Preferred Shares to foreign currency risk. The Company initially intends to hedge the majority of its exposures to foreign currencies back to the Canadian dollar, although there is no assurance the Portfolio will be substantially hedged at all times. The Company will take a tactical approach to determine whether to hedge the exposure to foreign currencies and the amount to be hedged, based on several factors, including a comparison of the costs that the Company would incur to enter into such hedging transactions against the benefits expected to be obtained.

The initial downside protection available to holders of the Preferred Shares is approximately 58% (after offering expenses). Downside protection available to the Preferred Shares consists of the net asset value (NAV) of the Class A Shares. The fixed distributions of dividends on the Preferred Shares will be funded from the dividends received on the securities in the Portfolio, which are expected to cover approximately 2.1 times the annual Preferred Shares distributions. The payment of regular monthly distributions to the holders of the Class A Shares, totalling $1.2 per annum, may reduce the downside protection over time. However, no monthly distributions to the Class A Shares will be made if the dividends of the Preferred Shares are in arrears or if the NAV of the Unit falls below $15.0. To supplement Portfolio income, the Manager may engage in covered call option writing on all or a portion of the securities held in the Portfolio, engage in securities lending, and rely on realized capital gains.

The Company will establish a loan facility for working capital purposes, with the maximum amount of 5% of the NAV of the Company. The Company may pledge the Portfolio securities as collateral for amounts borrowed under the loan facility.

A limited number of Class M Voting Shares that rank junior to the Preferred Shares and Class A Shares in respect of capital upon the dissolution, winding up, or liquidation of the Company have been issued by the Company. There are currently $100 worth of such shares outstanding. The Class M Shares are not entitled to receive any dividends for a long as any Preferred Shares or Class A Shares are outstanding. Furthermore, no additional Class M Voting Shares can be issued until the Preferred Shares and the Class A Shares have been retracted, redeemed, or purchased for cancellation.

On maturity, the holders of the Preferred Shares will be entitled to the value of the Portfolio up to the face value of the Preferred Shares and any accrued but unpaid dividends in priority to the holders of the Class A Shares and the Class M Voting Shares.

The provisional rating takes into consideration the credit quality and consistency of dividend distributions of the underlying Real Estate & E-Commerce Issuers included in the Portfolio, the expected level of downside protection available to the Preferred Shares, the dividend coverage ratio, the potential grind on the Portfolio arising from the targeted distributions to the Class A Shares, and the expertise and strong presence in the market of the Manager.

CORONAVIRUS-RELATED ANALYTICAL CONSIDERATIONS
This rating action was based on factors that included additional analysis and, where appropriate, additional assumptions were applied to expected performance as a result of the global efforts to contain the spread of the Coronavirus Disease (COVID-19). On April 16, 2020, the DBRS Morningstar Sovereigns group published its outlook on the impact on key economic indicators for the 2020–22 time frame. DBRS Morningstar last updated the macroeconomic scenarios on September 10, 2020, in its “Global Macroeconomic Scenarios: September Update” at https://www.dbrsmorningstar.com/research/366543/dbrs-morningstar-global-macroeconomic-scenarios-september-update. For the current rating action, DBRS Morningstar’s analysis considered impacts consistent with the moderate scenario in the referenced commentary.

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.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Canadian Split Share Companies and Trusts (June 23, 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.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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 info@dbrsmorningstar.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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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