DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debentures rating of SmartCentres Real Estate Investment Trust (SmartCentres or the Trust) at BBB (high) with Stable trends.
The Stable trends consider factors supporting the current rating, as further described below, as well as recent deterioration in SmartCentres' financial risk metrics relative to expectations on December 6, 2019, when DBRS Morningstar upgraded its rating on the Trust’s Senior Unsecured Debentures. DBRS Morningstar believes that SmartCentres’ precautionary debt-financed prefunding of future obligations (reflected in an elevated cash balance of $480.1 million at September 30, 2020), coupled with the negative impact of the ongoing Coronavirus Disease (COVID-19) pandemic on the Trust's operations and the consequent economic downturn, has largely driven the deterioration in the Trust’s financial risk metrics. The Stable trends reflect the material contribution from net profit on condominium closings completed year to date ($31.5 million) to EBITDA, which is consistent with DBRS Morningstar's revised analytical approach to SmartCentres. DBRS Morningstar now considers the Trust’s proportionate share of equity-accounted investments, which DBRS Morningstar expects to remain a significant source of cash flow. The Stable trends also consider the Trust’s ample access to liquidity with $491.3 million available on its operating facility, $481.0 million in cash on hand, and manageable maturities of unsecured debt over the next 18 months ($250 million Series R Senior Unsecured Debentures maturing on December 21, 2020, and $350 million Series T Senior Unsecured Debentures maturing on June 23, 2021).
DBRS Morningstar expects SmartCentres’ total debt-to-EBITDA ratio to improve modestly to the 9.0 times (x) range by YE2020 from 9.7 times (x) in the last 12 months ended September 30, 2020 (LTM) as the Trust uses its elevated cash balance as a source of funds. DBRS Morningstar anticipates further modest improvement through 2022 as SmartCentres’ operating environment continues to normalize. DBRS Morningstar also expects EBITDA interest coverage to improve modestly to the 3.3x range through 2022 from 3.21x in the LTM. Notwithstanding expected improvement, deterioration in the Trust’s total debt-to-EBITDA ratio relative to prior expectations may limit financial flexibility within the current rating category. DBRS Morningstar’s revised outlook contrasts with its prior expectations for SmartCentres’ total debt-to-EBITDA and EBITDA interest coverage (including capitalized interest) ratios to remain below 8.6x and above 3.0x, respectively, on a sustained basis through 2021.
The rating confirmations consider SmartCentres’ (1) strong tenant profile with Walmart Inc. (Walmart; rated AA with a Stable trend by DBRS Morningstar) comprising 25.6% of annualized rental revenue at September 30, 2020; (2) large retail property portfolio with newer, large, and open-format Walmart-anchored shopping centres generating stable cash flow; and (3) predominately unsecured debt capital stack (secured debt-to-total debt ratio of 30.3% at September 30, 2020) and sizable unencumbered asset pool ($5.8 billion), which together warrant a one-notch uplift to SmartCentres' stand-alone credit assessment. The ratings are constrained by (1) elevated leverage as measured by the total debt-to-EBITDA ratio; (2) concentration risks with asset-type concentration as a retail-focused real estate entity, tenant concentration (most significantly, Walmart) and geographic concentration in the Greater Toronto Area; and (3) development risk with $400 million in estimated costs to complete projects over the next several years (as of September 30, 2020).
DBRS Morningstar could take a negative rating action if the Trust’s operating environment deteriorates more than DBRS Morningstar currently anticipates, such that the total debt-to-EBITDA outlook remains above 9.3x on a sustained basis, all else equal. DBRS Morningstar is not contemplating a positive rating action at this time in light of constraining factors.
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 2, 2020), 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 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.
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