DBRS Morningstar Places Artis REIT’s Ratings of BBB (low)/Pfd-3 (low) Under Review with Negative ImplicationsReal Estate
DBRS Limited (DBRS Morningstar) placed Artis Real Estate Investment Trust’s (Artis or the REIT) Issuer Rating and Senior Unsecured Debentures rating of BBB (low) and Preferred Trust Units rating of Pfd-3 (low) Under Review with Negative Implications. These rating actions reflect DBRS Morningstar’s expectation that the announcement of Artis’ current management team leaving the REIT may have a negative impact on its credit risk profile and may impair its ability to reduce leverage in a timely manner.
Artis announced an agreement through which certain members of the management team, including the chief executive officer (CEO) and the chief financial officer (CFO), are stepping down as a result of activist unitholder (the Sandpiper Group) pressure. Sandpiper has been advocating against Artis for the spinoff of its retail portfolio, cutting costs, and increasing distributions to unitholders as well as other initiatives. The REIT also announced the reconstitution of its board and a new interim CEO, who is also the CEO of Sandpiper. DBRS Morningstar notes that Artis had been engaged in a strategic debt reduction initiative, including the retail portfolio spinoff, that had the potential to stabilize Artis’ credit profile within an acceptable time frame (see DBRS Morningstar’s commentary “Artis REIT’s Proposed Spin-Off and Debt Reduction Could Stabilize Rating Trend,” dated September 9, 2020).
As a result of the uncertainty created by the change in management, DBRS Morningstar is placing Artis’ ratings Under Review with Negative implications. As part of its review, DBRS Morningstar will determine the new management team’s commitment to and updated plans for lowering leverage. Should DBRS Morningstar determine that the REIT’s successful reduction of leverage is likely, DBRS Morningstar would likely change the trend for Artis’ ratings to Stable upon completion of the review. Conversely, DBRS Morningstar would likely take a negative rating action on Artis’ ratings should it determine that management is unlikely to reduce total debt-to-EBITDA ratio below 9.8 times (x) or increase EBITDA interest coverage above 2.70x.
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: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2, 2020), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
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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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- Rating Entities in the Real Estate Industry (Archived) / June 4, 2020
- DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary (Archived) / November 2, 2020
- DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (Archived) / November 2, 2020